Summary of the Impact of Tax Reform on the Research Credit:
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
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Loss carryback provisions have been repealed, however, loss carryforwards can now be carried forward indefinitely, effective for tax years ending after December 31, 2017
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
AMT – repealed for Corporate taxpayers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.
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