2016 ushered in changes that could have a significant, positive impact on many income tax returns. Congress expanded the research & development (R&D) tax credit for certain start-ups and small businesses, and the IRS issued guidance that will help restaurants and retailers recover remodeling/refresh costs more quickly. The IRS also continued work to finalize rules on the applicability of the Domestic Production Activities Deduction (DPAD) that benefits domestic-based manufacturing businesses. How might these changes benefit you and your business?
R&D tax credit
Here are some key things to remember about the R&D credit:
- In addition to traditional research, costs associated with the development and improvement of manufacturing processes and software may also qualify for the credit. Eligible costs are those that improve the function, performance, reliability, or quality of products or processes.
- New for startups and small-to-midsize growing businesses:
- Companies in business for five years or less that have gross receipts of less than $5 million may be able to use the credit to offset some of its payroll taxes.
- Owners of businesses with average annual gross receipts of not more than $50 million for the last three years may be able to use the credit to offset their alternative minimum tax liability.
Safe harbor for retail/restaurant refresh/remodeling costs
The IRS provided relief to restaurants and retailers with respect to amounts spent on refreshing and remodeling their facilities. These businesses regularly overhaul their spaces in order to maintain an attractive environment and comply with industry standards. Previously, it was unclear how much of these remodel or refresh costs could be treated as a current repair expense and how much needed to be capitalized. For businesses that have audited financials and meet the government’s criteria, the new safe harbor allows 75 percent of these costs to be expensed in the current year, leaving only 25 percent to be capitalized and depreciated.
Domestic production activities deduction
The DPAD is available to U.S. “producers” including manufacturers, miners, farmers, software developers, film production companies, and construction businesses. The deduction provides an incentive for businesses to keep production activities in the United States. Identifying eligible revenues and computing the related deduction can be complicated, but it can result in a savings of 9 percent on income from covered activities. The IRS is also working on new guidance that will clarify when and how contract manufacturing and software development businesses qualify for DPAD-related benefits.
Never a bad time to plan
Planning for any of these opportunities should be done early. The right change can make a big difference.