R&D Tax Credit News

Tax Cuts and Jobs Act, H.R. 1

December 22, 2017

Summary of the Impact of Tax Reform on the Research Credit:

1. Section 280C benefit increased
   • Due to the corporate tax rate cut from 35% to 21%, the election to reduce the credit under Section 280C will result in claiming 79% of the credit instead of 65%
   • Fiscal Year Taxpayer implications – because the rate decreased to 21% as of a specific date, rather than effective for a tax year, taxpayers with fiscal year ends vs. calendar year end will use a blended rate for the first year during 2018. The blended rate will be calculated by a ratio of number of days in 2017 and 2018.
   • Effective Date – January 1, 2018
2. Net Operating Loss Deduction Changes
   • The new law provides that taxpayers can only offset 80% of their taxable income (TI) with net operating loss carryforwards (NOL). Therefore, taxpayers with NOLs may now benefit currently from the credit since they will be subject to tax on 20% of their TI.
   • Effective Date – Tax years beginning after December 31, 2017
   • Loss carryback provisions have been repealed, however, loss carryforwards can now be carried forward indefinitely, effective for tax years ending after December 31, 2017
3. Required Amortization for Research Expenses
   • The new law requires taxpayers to capitalize and amortize Section 174 (R&D) expenditures over 5 years, beginning with the midpoint of the taxable year the expenditure is incurred. Non-US expenditures will be amortized over 15 years.
   • Software development costs will also be treated as 174 expenditures and will therefore fall under the same amortization requirements.
   • Effective Date – tax years beginning after December 31, 2021
4. AMT – repealed for Corporate taxpayers
   • Individuals still subject to AMT
   • New law temporarily increases the AMT exemption amount and the phase-out thresholds (MFJ exemption is $109, 000, phase-out is $1 M)
   • Taxpayers with less than $50 M average receipts will still benefit from Path Act
   • Effective Date – Tax years beginning after December 31, 2017. The increased exemption amounts and phase-out thresholds are scheduled to sunset after December 31, 2025.
5. Base Erosion Anti-Abuse Tax (BEAT)
   • The research credit can be used to offset this new tax
   • BEAT applies to taxpayers with gross receipts greater than $500 M. It is essentially a minimum tax on base erosion payments to foreign-related parties.
   • Effective Date – Tax years beginning on or after December 31, 2017