New law. The Act retroactively and permanently extends the research credit. (Code Sec. 41(h), as amended by Act Sec. 121(a)(1))
RIA recommendation: Because the extension of the research credit is retroactive to include amounts paid or incurred after Dec. 31, 2014, taxpayers, such as fiscal year corporations that already filed returns for a fiscal year that includes part of 2015, or any other taxpayers that have filed returns for tax years ending after Dec. 31, 2014, should consider filing an amended return to claim a refund for the amount of any additional tax paid because of not claiming amounts now eligible for the credit.
Offset against AMT. For credits determined for tax years that begin after Dec. 31, 2015, eligible small businesses ($50 million or less of gross receipts) may claim the credit against their alternative minimum tax (AMT) liability. (Code Sec. 38(c)(4)(B)(ii), as amended by Act Sec. 121(b))
Offset against payroll tax. For tax years that begin after Dec. 31, 2015, qualified small businesses may elect to claim a portion of their research credit as a payroll tax credit against their employer FICA tax liability, rather than against their income tax liability. (Code Sec. 41(h) and Code Sec. 3111(f), as amended by Act Sec. 121(c))
A qualified small business is one that, in the case of a corporation or partnership, with respect to any tax year:
- Has gross receipts (as determined under the rules of Code Sec. 448(c)(3), without regard to Code Sec. 448(c)(3)(A)) of less than $5 million, and
- Did not have gross receipts (as determined in (1), above) for any tax year preceding the 5-tax-year period ending with the tax year. (Code Sec. 41(h)(3)(A)(i))
An individual can qualify if he meets the two conditions above, taking account the aggregate gross receipts received by the individual in carrying on all his trades or businesses. (Code Sec. 41(h)(3)(A)(ii)) Special aggregation rules apply. And an organization exempt from tax can’t be a qualified small business. (Code Sec. 41(h)(3)(B))
The payroll tax credit portion is equal to the least of:
- An amount specified by the taxpayer that does not exceed $250,000,
- The research credit determined for the tax year, or
- In the case of a qualified small business other than a partnership or S corporation, the amount of the business credit carryforward under Code Sec. 39 from the tax year (determined before the application of Code Sec. 41(h) to the tax year). (Code Sec. 41(h)(2))
The election can’t be made for a tax year if the taxpayer has made such an election for five or more preceding tax years. (Code Sec. 41(h)(4)(B)(ii)) For a partnership or S corporation, an election to apply the credit against OASDI liability is made at the entity level. (Code Sec. 41(h)(4)(C))
The payroll tax portion of the research credit is allowed as a credit against the qualified small business’s OASDI tax liability for the first calendar quarter beginning after the date on which it files its income tax or information return for the tax year. The credit can’t exceed the OASDI tax liability for a calendar quarter on the wages paid with respect to all employees of the qualified small business. If the payroll tax portion of the credit exceeds the qualified small business’s OASDI tax liability for a calendar quarter, the excess is allowed as a credit against the OASDI liability for the following calendar quarter. (Code Sec. 3111(f))
The credit allowed against employer FICA can’t be taken account for purposes of determining the amount allowable as a payroll tax deduction. (Code Sec. 3111(f)(4))
Exemption for RIC Interest-Related Dividends and Short-Term Capital Gains Dividends Permanently Extended
Under pre-Act law, a regulated investment company (RIC) may designate and pay (1) interest-related dividends out of interest that would generally not be taxable when received directly by a nonresident alien individual or foreign corporation, and (2) short-term capital gains dividends out of short-term capital gains. RIC dividends designated as interest-related dividends and short-term capital gains dividends are generally not taxable when received by a nonresident alien individual or foreign corporation and aren’t subject to the withholding tax imposed on nonresident alien individuals and foreign corporations.
Under pre-Act law, these provisions didn’t apply to dividends with respect to any tax year of a RIC beginning after Dec. 31, 2014.