R&D May Be the Next Focus of COVID-19 Relief
Business owners and their CPAs must consider if an expanded R&D tax credit can help crisis-time cash flow needs.
Digital Exclusive - 2020
Congress will soon return from its July recess, and a hard look at the next round of COVID-19 relief legislation is in store before an August recess. What will be of interest to CPAs and their business clients is what becomes of the R&D tax credit, which has been used to encourage economic growth.
New R&D tax credit proposals legislators will likely consider include doubling the R&D tax credit, allowing businesses to currently use their R&D tax credit and other credits rather than having to carry-forward unused credits if they are in a loss situation, expanding the R&D tax credit percentage for domestic manufacturing, and increasing the refundable R&D credit for start-ups. Legislators view the R&D tax credit as a tool for strengthening our manufacturing base, and newly increased credits could be used as an effective tool to help companies manager their cash flow needs while encouraging increased manufacturing in the U.S. as opposed to manufacturing overseas.
Expanding the employee retention credit (with a much higher dollar threshold than currently in place) and a payroll tax holiday for both employees and employers have also been discussed. Of course, Congress will also consider whether the Treasury issues another round of checks to families and individuals. The $600 add-on weekly payment for unemployment expiring at the end of July certainly places an urgency on Congress to pass some form of further COVID-19 relief before the August recess.
Some other anticipated key non-tax provisions include looking at funding for state and local governments to replace lost tax revenues, appropriations for COVID-19 testing and treatment, and supplemental payments to frontline health workers, which passed the House and will be put forward for consideration in the Senate.
The current expectation of any deal is it will be more modest than the $3 trillion package passed in May. Rumored compromises hint at some relief for state and local governments, assistance for health workers, liability protections, tax incentives for hiring and retaining workers, some additional relief for families, and support for business (including the R&D tax credit).
With Congress talking seriously about expanding the R&D tax credit, it’s time to look hard at whether your company or your clients’ may qualify. The law as it relates to the R&D tax credit has changed over the last several years, mostly for the better. So, if you’ve looked before and thought you or your client didn’t qualify, look again. Basically, if a company makes something, or is improving something it already makes or how it makes it, it may qualify for the R&D tax credit. Remember, the credit is not just about basic research but also includes activities for applied research.
Too often, companies think they aren’t eligible for the R&D tax credit because they’re being paid or contracted to do certain work. However, a recent tax court case, Populous Holdings Inc. v Commissioner of Internal Revenue Service
(2019), has good news for contractors, especially government contractors. In short, the court ruled the contractor was eligible for the R&D tax credit even though the contractor was paid. It found that the contractor had economic risk and retained substantial rights. So, it’s definitely worth reviewing business contracts to see if they may qualify for the R&D tax credit.
The biggest change for small and mid-size business owners in recent years is that it’s now permanent that they can take the R&D tax credit against their individual alternative minimum tax. This utilization will largely increase necessary cash flow to business owners during these tough times.
More recently, Congress made the R&D tax credit partially refundable (against employer payroll tax) and allowed start-ups to benefit. As mentioned, Congress is looking strongly at expanding the refundable piece of the R&D tax credit.
Also, IRS regulations were updated to allow for a bigger window for companies to potentially qualify for the R&D tax credit for developing internal-use software—meaning many businesses that historically have not been good candidates for the R&D tax credit should look again.
To sum things up, I expect things to move fast and furious before the August break. A key is that Senate Leader Mitch McConnell (R-KY) has signaled his openness to moving another relief package forward. The relief package should include provisions to encourage businesses to bring back and/or retain employees and keep their doors open, as well as incentives to foster long-term growth in the U.S.—the key being a more robust R&D tax credit.
Rick Meyer, CPA, MBA, MST is a director for alliantgroup, a national firm that works with businesses and their CPAs to identify powerful government-sponsored tax credits and incentives. He is a long-time member of the Illinois CPA Society and has served on various tax committees over the past 40-plus years.