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A word to the wise for apparel companies: Don’t miss out on tax savings you’re entitled to.
As we neared the 2015 December holiday season, Congress was busy working on its annual gift package of new U.S. tax incentives and extenders of tax incentives that expired at the end of 2014. These incentives represent over fifty expired provisions and include such items as bonus depreciation, increases to the Sec. 179 deductions (expensing provision) and the research and development (R&D) credit. Usually these types of items are extended for one year and expire on December 31. The process then repeats every December going forward.
However, this past December Congress sent President Obama the year-end tax incentives package known as The Protecting Americans from Tax Hikes Act (PATH) of 2015, which he signed into law on December 18. One of the most important provisions of this new law is related to the R&D credit. Instead of just extending the current R&D provisions for one year as they have in the past, they expanded the law and made the R&D credit provisions permanent, which is very significant for proper tax planning.
Often, when I am speaking to owners and management of apparel companies, they are not aware that they may qualify for the R&D tax credit. This credit is effectively a cash incentive provided by our government for research and development activities performed by companies in the United States. Over the years, Congress has expanded these laws, and more and more activities and companies qualify for the credits. It doesn’t just apply to technology and drug companies. It is for any company that designs, develops or improves products and/or processes. For apparel companies, typical “R&D” activities involve the design and development of new garments and techniques. These include new garments, accessories, shoes, fabrics, chemical treatments, etc. You do not need to have a special lab set up for R&D to take place.
Unfortunately, one of the most significant limitations companies historically faced from the R&D credit was the Alternative Minimum Tax (AMT) limitation. The R&D credit in the past could only reduce the regular tax down to the amount of AMT. For many taxpayers, this eliminated the benefits of the credit. AMT is complex, but in short, it is a parallel tax calculation and the tax you pay is the greater of your regular tax or the AMT. Since the credit did not reduce AMT, it was not useful to many taxpayers. One of the most significant and beneficial changes under the PATH is the credit can now reduce AMT as well as the regular tax for companies with under $50 million in gross receipts. This was the greatest impediment preventing companies from taking advantage of the R&D credit, and it has now been eliminated.
For companies that faced this in the past, it is time to look at this credit again. The other new R&D provision of the PATH targets start-up companies, allowing for a credit against payroll taxes for companies with less than $5 million in gross receipts. This provision is capped at $250,000 of credits per year for 5 years.
As with many tax laws, understanding if you qualify for, and can take advantage of, R&D credits requires proper record keeping and documentation. Qualifying activities, and the time employees spend on these activities, must be identified and documented.
If you have not explored the potential benefits of R&D credits, you can reach out to your Friedman advisor or contact me at DMcKelvey@friedmanllp.com to help you take advantage of this cash incentive.