In a temporary effort to boost the economy in 1981, the federal government sought to use the passage of the Research and Experimentation credit to reward businesses for investing in research. With the rapid changes in technology in the past decades, companies across multiple industries have seen increasing challenges to constantly innovate their products or processes to compete across a global economy. Business owners small and large understand the expensive and time-consuming risks that drastic innovations pose and thus, often failing– yielding no financial return on investment.
Recognizing the need to create jobs domestically and maintain global economic competitiveness, Congress has extended the R&D Incentives more than a dozen times over subsequent years making them permanent with the passage of the PATH Act of 2015. In addition to becoming permanent, the Protecting Americans from Tax Hikes act expanded R&D Tax Incentives provisions to start-ups and small businesses. The R&D incentives are now available to any U.S. business that spends time and resources on new development, improvements, or technological advancements in an effort to improve upon its products or processes. The incentive could also be available to American Business owners who have improved upon the performance, functionality, reliability, or quality of existing products or trade processes.
ABOUT THE INCENTIVES
As of January 1, 2016, Eligible Small Businesses (ESBs) can use the incentive to offset the Alternative Minimum Tax (AMT). An ESB can be a non-publicly traded corporation, partnership, or sole proprietorship with annual revenues under $50 million for the three tax years prior to the current year. Credits can be retroactively captured subject to special rules under section 448(c)(3). Section 41 of the Internal Revenue Code lays out the rules and regulations surrounding the R&D Incentives. There are a couple misconceptions surrounding the new regulations; 1) it is difficult to apply for the incentives and, 2) it is restricted to a small group of industries. This could not be further from the truth. The goal of the PATH Act is to encourage innovation in businesses across the United States. The U.S. courts and states alike have ruled in favor of business activities that make jobs faster and more efficient. This could be anybody from a contractor who uses new materials to create green energy efficient improvements, to a manufacturer improving production processes through investment in new technology.