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Beneficial Tax Changes
By David M. Hull, CPA
Congress Passes Extension of Research Tax Credit and AMT Relief
On October 3, 2008 the House of Representatives passed the Economic Recovery Bill. The Rescue plan included an extension of the Federal Research Tax Credit. The credit expired as of December 31, 2007. The legislation extends the act through December 31, 2009. In addition, it makes changes to the credit: increasing the Alternative Simplified Credit amount from 12% to 14% and eliminating the Alternative Incremental Method starting in 2009.
Both Alternative methods were implemented to provide credit for those taxpayers that either couldn’t determine a base period percentage or whose calculated base percentage produced a base that substantially limited their credit. The newer Alternative Simplified Method virtually obsoletes the need for the older Alternative Incremental Method. In all but the most extreme cases, the newer Alternative Simplified Method produces a greater credit than the Alternative Incremental Method.
Under this legislation, Congress is increasing the percentage of the Alternative Simplified Method from the current 12% to 14%. Two of the most ardent and powerful proponents of the Research Tax Credit, Senate Finance Committee Chairman Max Baucus (D-Mont.) and Ranking Member Chuck Grassley (R-Iowa), have published their desire to have the Alternative Simplified Method eventually increase to 20% and then eliminate the Traditional Method. If the Alternative Simplified Method is increased to 20%, then it will produce a credit, on average, higher than the traditional Method. At that point, the support for the Traditional Method will evaporate.
By replacing the December 31, 2007 expiration date with December 31, 2009, the legislation treats the credit as if it never really expired. Taxpayers that filed fiscal year income tax returns including a portion of 2008 may now file amended returns to receive credit for expenses incurred after December 31, 2008.
In another area pertinent to many small business owners, the Economic Recovery Bill brings changes to the Alternative Minimum Tax (AMT). Since the Research Tax Credit is a non-refundable credit that is limited by the AMT, what happens here is important in the usability of the credit. The Economic Recovery Bill raised the AMT exemptions on individuals to $69,950 for married couples and $46,200 for singles. The credits for dependent care and tuition can still offset AMT.
With a new administration coming into office, look to other changes affecting the Research & Development world soon. President-elect Obama has promised to make the Research Tax Credit permanent. Also, the highly popular Small Business Innovation Research (SBIR) Program expires on March 20, 2009. Most in Congress have not only vowed to extend the SBIR program, but also increase its funding.
We’ll keep you posted.
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