A variety of states offer financial incentives in the form of tax credits to attract and retain higher paying jobs in manufacturing, science and technology. Beginning with the 2018 filing year, the Massachusetts credit has been increased significantly for taxpayers who qualify. For many years, the credit was limited to a maximum of five percent of qualified research expenditures (QRE). It was further limited to the “regular credit” calculation under section 41 of the Internal Revenue Code. That second limitation was important because it eliminated a lot of companies from eligibility if they couldn’t calculate a historical base period or if their investment intensity in QRE fell below historical levels. Beginning in 2015, the alternative simplified credit calculation became available, enabling many more firms to claim benefits. Beginning this season, the amount of the credit has been increased by half, up to a maximum of 7.5 percent of QRE for many taxpayers. The credit must be claimed on a timely-filed return in order to qualify. Also, the claiming company must have at least three years of QRE history in order to gain the top rate. Other firms are limited to five percent of QRE.
In addition, it is important to remember that the federal credit is now available to companies in a loss position for the current filing year, so long as they have sufficient employment taxes on which to draw. This benefit is available only to companies with gross receipts (that is, total sales net of any returns and allowances) under $5,000,000 and who have never before surpassed that level. Also, AMT (Alternative Minimum Tax) rules no longer apply in many cases.
The Tax Cuts and Jobs Act (TCJA) made many changes to the way we think about the way income and related credits should be evaluated. We intend to make this the topic of a new blog post, coming soon to a browser near you. Meanwhile, it is important to keep in mind that *many* more companies are now eligible for the federal section 41 research credit than were eligible before.
The TCJA has made many other changes to the federal tax code. Some of these changes benefit all taxpayers in the short term, but many of them extend preferential treatment only to the most wealthy among us. Here at Tax Credit Advisors, LLC, we are dedicated to helping all taxpayers find the most beneficial outcome for their specific situation.
This topic and many others will be covered in much more detail at our upcoming seminar entitled “Federal & State R & D Credits”, which will be held at the Hyatt House in Waltham, MA on Monday, June 17th at 1:30 pm. We hope to see you there!