Tax Law

Global Positioning of IP: State Research and Development Credits

by William H. Byrnes and Marvin Petry *

Federal and state research and development (R&D) tax credits are powerful yet underutilized opportunities that can make a big difference in operating performance and cash flow for companies that rely on performing R&D activities and high-tech manufacturing in the US. Individual states are continuously trying to outdo one another by offering incentives to attract corporate America to their local geographies in hope of boosting employment and revenue. R&D tax credits are one of many such incentives. Since most state R&D tax credits are derived from the federal calculation methodology, the incremental effort to quantify and claim them is relatively small, assuming a taxpayer has already substantiated the federal R&D tax credit.

The perception that the federal R&D tax credit only applies to laboratory drug discovery companies or high tech manufacturing companies is false. The truth is that any business operating in a technical field, whose employees experiment to develop new or improved products or processes, may potentially qualify and claim valuable R&D tax credits. In fact, it is the time that each employee spends performing qualified activities that will be far and away the most significant catalyst for the credit calculation.

The federal R&D tax credit was first introduced by Congress in 1981 to reward U.S. companies for increasing spending on R&D within the U.S. The R&D tax credit is available to businesses that design or develop new, improved or technologically advanced products, processes, principles, methodologies or materials. In addition to ''revolutionary'' activities, in some cases, the credit may be available to companies that have performed ''evolutionary'' activities, such as investing time, money and resources toward improving products or processes.

On December 18, 2015, President Obama signed into law The Protecting Americans from Tax Hikes Act (PATH) of 2015. This legislation retroactively renewed and made the R&D tax credit permanent. The R&D tax credit was the largest single item in the package, with a cost of approximately $113 billion over 10 years. In addition to making the credit permanent, the legislation in the PATH Act is a game changer for a large number of taxpayers who have been unable to take advantage of the credit previously. First, the legislation allows small businesses to take the R&D tax credit against their alternative minimum tax (AMT). The AMT restriction has long been preventing qualified companies from utilizing the research credit, so this new legislation will remove that hurdle for any qualified company with less than $50 million in gross receipts. Secondly, PATH allows startup businesses with gross receipts of less than $5,000,000 to take the R&D tax credit against their payroll taxes (essentially making it a refundable credit for up to 5 years). Both of these changes are effective for taxable years beginning after Dec. 31, 2015.


* Professor William H. Byrnes, an Associate Dean of Texas A&M University School of Law. William has been commissioned by a number of governments for guidance on tax and professional education policy. In 1994 William pioneered online legal education, and in 1998 created the first online LL.M. acquiesced by the ABA. He speaks globally on best practices for distance education.

Marvin Petry, Esq, is Martindale Hubbell peer rated AV-Preeminent, and since 2009 has annually been included within the list of Best Lawyers(R) in America, Intellectual Property Law. Marv is a Member of Stites & Harbison, PLLC, Alexandria VA.

Information referenced herein is provided for educational purposes only. For legal advice applicable to the facts of your particular situation, you should obtain the services of a qualified attorney licensed to practice law in your state. 

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