Did You Know: The Corporate AMT and DPAD are Dead, but Research Tax Credits Live On?
Did you know:
The Tax Cuts and Jobs Act repeals the Section 199 Domestic Production Activities Deduction (DPAD) for tax years beginning after 2017 as well as the corporate Alternative Minimum Tax (AMT) but the Research & Development (R&D) tax credit was retained, and is now more valuable given reduction of the corporate tax rate from 35% to 21%.
Now that you know – here’s what it means!
With DPAD going away, the Research Tax Credit is now more valuable given reduction of the corporate tax rate from 35% to 21%. And, since the corporate AMT was repealed beginning in 2018, taxpayers who would have been subject to AMT and therefore generally wouldn’t have been able to use R&D tax credits to offset their federal income tax liability now will be able to do so. Going forward, any prior corporate AMT credit carryovers may offset the regular tax liability for any taxable year after 2017.
And here are the details:
Designed to encourage investment in innovation, the R&D tax credit can sometimes be overlooked by manufacturers who often think that “R&D” is a bar too high to meet.
The U.S. Tax Court, however, has said that “routine engineering” and “routine software development” can qualify; and it and other courts have upheld all sorts of efforts to attempt to make things better, faster, cheaper or greener, e.g., specifying and integrating existing components into an overall design for a new system, evaluating the efficiency of a third party’s technology to perform within an existing production process and engaging in scale-up activities to resolve engineering uncertainties not eliminable through testing on smaller processes or equipment.
This is true regardless of what’s being manufactured: paper; food; apparel; chemicals; furniture; plastics—it doesn’t matter. All of these industry subsectors have reported millions of dollars of R&D credits, and they’ve enjoyed the tax savings, reduction in effective tax rates and increase in earnings and cash flows that R&D credits can bring.
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