The PATH Act and Its Effects on the R&D Tax Credit

The research and development tax credit has historically been an important source of funding for profitable businesses paying income taxes by providing a dollar-for-dollar tax liability reduction. However, as of 2015, the Protecting Americans from Tax Hikes (PATH) Act introduced new legislation allowing qualified small companies to apply for the program as well. Thanks to the passage of this Act, the R&D tax credit also became permanent, effectively ending decades of recurrent expirations and renewals.

Today, several years after its passing, we continue to feel the effects of the PATH Act, with more and more businesses taking advantage of R&D tax credits. For this reason, here’s a more detailed look at the PATH Act and its impact on the R&D incentive.

What Is the PATH Act?

A statute from the Obama administration, the Protecting Americans from Tax Hikes (PATH) Act of 2015, renewed or extended over 50 temporary tax credits for companies, families, and individuals. At the same time, the Act prevented fraudulent claims for those benefits. This Act is still in effect.

It mainly impacts taxpayers who qualify for particular tax credits. For example, those who apply for the EITC (Earned Income Tax Credit) or the ACTC (Additional Child Tax Credit) must provide a valid ITIN (Individual Taxpayer Identification Number) or Social Security number. However, if a taxpayer did not use ITIN in a tax file during the preceding three years, it is no longer valid and has to be replaced.

Nonetheless, refunds for these credits are not provided until the 15th of February each year. The extended due date allows the IRS enough time to investigate fraudulent claims.

R&D Tax Credit Before the PATH Act

Since its passing in 1981, the R&D tax credit has helped companies maximize cash flow opportunities on activities they would typically carry out inside their enterprises. Every year eligible taxpayers successfully claim R&D tax credits worth billions of dollars to fund expansion and operations. However, the incentive initially came with several limitations that kept many businesses from applying for the program.

In other words, this credit was intended to be a short-term resource. Entrepreneurs had to wait to submit their claims each year to see if Congress would extend the project. As a result, companies that depended on the R&D tax credit faced a number of issues. For instance, while awaiting the final government decision, business owners could not effectively plan, recruit, or budget.

Furthermore, the R&D tax credit was originally only open to businesses that generated a profit during the claim year. If a company had a loss, they were able to claim a credit on their tax return, but they couldn’t use it to offset taxes already paid. Lastly, from 1981 to 2015, business owners could only use R&D tax incentives to reduce their regular tax obligations. However, in 2015, the Protecting Americans from Tax Hikes (PATH) Act was introduced, and it made significant changes to the R&D tax credit in its application and availability to business owners.

Three ways the PATH Act Changed R&D Tax Credit

The PATH Act had a substantial influence on the R&D tax incentive. The three most significant changes relate to the program duration, startups, and Alternative Minimum Tax (AMT).

The Length of the Program

As mentioned before, prior to the PATH Act, the R&D tax credit was usually only renewed for one or two years. However, the Act formally established this tax incentive as a permanent program on the 1st of January, 2015.

Including Startup Companies in the Program

The R&D tax credit, as originally designed, precluded small companies and startups from participating in the program. But when the Act altered the qualification conditions, small companies could claim up to $250,000 in R&D credits a year against their payroll tax burden for up to five years. That said, to become eligible, a firm still must present gross receipts for the current tax year totaling less than $5 million.

Alternative Minimum Tax

As discussed above, before the Act, taxpayers could only offset their regular tax liabilities with the R&D credit. Consequently, if their ATM was higher than their regular tax, companies could not claim the R&D incentive. That said, if their regular tax burden was only slightly higher than their AMT, they were able to use the incentives to reduce the liability down to the ATM level. However, after the PATH Act was passed, company owners were allowed to use the R&D tax credit to reduce their AMT.

Why Is the PATH Important?

Perhaps the PATH Act’s most significant impact is reducing fraud committed against individual taxpayers and the IRS. However, other effects, like expanding and making the R&D tax programs permanent, are also significant because they have allowed more companies to take part. As a result, small companies are now able to invest more in innovation and research.

When You Need Expert Help

Contact our team if you want to learn more about the state and federal R&D tax credits within your industry. We can determine whether your company qualifies to receive any benefits and help you through the application process.

FAQs

How Does the PATH Act Affect Me?

Your employers must now provide W-2 to the IRS before the 31st of January. Moreover, your refunds with EITC and ACTC will not be released before the 15th of February. But you can expect to receive them by the end of February.

Can I get my EITC and ACTC refunds at the same time as my tax refunds?

Although it is unlikely, there’s a small chance you will receive EITC, ACTC, and tax refunds at the same time. Basically, it all depends on the exact date you applied for a tax return. In general, you will get a tax refund within 21 days of application acceptance, while the IRS won’t issue refunds before the 15th of February due to the PATH Act.

I want to know the status of my refund application. Where can I obtain that information?

If you have questions regarding your tax refund application or did not receive the refunds 4 to 6 weeks after the due date, it is best to consult the IRS “Where’s My Refund?” page.