Senator Maggie Hassan (D-NH) and Senator Thom Tillis (R-NC) have proposed a bill that would double the refundable research credit and increase the alternative simplified credit rate for new and small businesses.

Background

Historically, many small businesses and start-up companies could not immediately utilize the research credit because they were not generating regular tax that could be offset by general business credits like the research credit. The Protecting Americans from Tax Hikes Act of 2015 (PATH Act) added new IRC Sections 41(h) and 3111(f) to allow qualified small businesses to apply the research credit against the employer's payroll tax liability (of up to $250,000 annually) for tax years beginning after December 31, 2015. For these purposes, a "qualified small business" is generally defined as a corporation, partnership or sole proprietorship with: (1) gross receipts of less than $5 million for the tax year and (2) no gross receipts for any tax year before the five tax years ending with the election year.

New research credit bill

The bill would double the refundable research credit for new and small businesses by increasing the refund cap from $250,000 to $500,000 and indexing the cap for inflation. The bill also would expand refundability of the research credit to cover all payroll taxes and extend the credit to more small businesses by increasing the eligibility cap from $5 million in receipts to $10 million in receipts.

Additionally, the bill would increase the alternative simplified credit rate from 14% to 20% for new and small businesses that qualify for the refundable credit. The bill would allow a new business to claim the expanded 20% alternative simplified research credit against its current-year spending in the first year the business claims the credit. A new business without research and development expenditures in each of the three previous tax years would then be permitted to choose either a 10% credit against current-year research and development or the full 20% credit for research and development spending that is above half of the previous three-year average, not taking into account years without research and development expenditures.

Implications

If enacted, the bill would increase both the availability of the IRC Section 41(h) payroll offset option as well as its ability to generate cash tax savings for eligible taxpayers. Further, the bill would create what amounts to a new credit methodology by modifying the alternative simplified credit solely for those taxpayers that meet the eligibility requirements of IRC Section 41(h). These eligible taxpayers would doubly benefit by both generating a higher credit amount and being able to apply more of the credit generated against their payroll tax.

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