One of the most frequently asked questions we receive from our potential clients are “how much R&D tax credit can I utilize”. Although the answer varies significantly by individual company situation, one of the biggest myths related to the utilization of the R&D tax credit is whether the credit can offset tentative minimum tax (TMT).
Historically, the R&D tax credit can only be used to reduce regular income tax above tentative minimum tax, creating a very limiting situation for any taxpayers that are subject to alternative minimum tax (AMT) due to a higher tentative minimum tax than regular tax calculated, as they cannot be benefit from the R&D tax credit or any other business credits on their Form 3800.
In 2015, the situation has changed following the passage of the Protecting Americans From Tax Hikes (PATH) Act, which has cleared path for “eligible small businesses” to use R&D tax credit against AMT, starting tax year 2016.
Specifically, the R&D tax credit becomes part of a special credit category, per I.R.C. § 38(C)(4)(A) and (B), that can use $0 as tentative min tax for determining the limitation of the credit for any eligible small businesses (EBSs), defined by I.R.C. § 38(C)(5) as corporations, partnership, or sole proprietorships with average annual gross receipts for the 3-taxable-year period preceding such taxable year below $50,000,000.
As a result of the legislation changes, the tentative minimum tax would be $0 on Form 3800 (General Business Credit Form) for the vast majority of the small- and medium-sized companies, including pass-through entities. The changes have effectively created a much lower threshold for the taxpayers to utilize the R&D tax credit timely to offset income tax liabilities as opposed to carrying the credit forward for future usage.