This article is a contributed story by Star Fischer and Tom Sanger, CPAs, Partners, Moss Adams
The new tax law, called the Tax Cuts and Jobs Act (TCJA), will have a significant impact on Washington state companies and owners. Here’s an overview of changes impacting taxpayers that perform research and development (R&D):
R&D Tax Credit Implications
The reduced corporate tax rate will increase the benefit amount for certain companies taking the R&D tax credit. As with the previous law, companies are required to reduce the R&D expenses they report by the credit amount they receive, which creates an increase in income and a corresponding tax increase. To avoid this, taxpayers can elect to take a smaller credit, which is reduced by the highest corporate tax rate. Because that rate has dropped from 35 percent to 21 percent, the amount companies can reduce their R&D credits has fallen as well, resulting in higher benefit for companies that use this option.
Increased Credit Usability from Elimination of Corporate AMT
Under the new tax law, there is no corporate alternative minimum tax (AMT). However, taxpayers with more than $25,000 in regular tax liability may not offset more than 75 percent of their liability using the R&D tax credit.
Previously, the individual AMT sometimes prevented individuals from using the R&D credit. The AMT exemptions for individual taxpayers are now increasing, meaning individual taxpayers are likely to use more of the R&D credits passing through to them from their businesses.
Retention of Eligible Small Business Credits
In the past, corporations or owners of pass-through companies with less than $50 million in average revenue over the prior three years were allowed to use the R&D credit to offset AMT. Going forward, corporations won’t be subject to AMT. However, the eligible small business provision will still substantially benefit individual taxpayers with R&D credits.
Amortization of R&D Expenses Starting in Tax Year 2022
Taxpayers used to be able to deduct their R&D expenses or charge them to a capital account. Now, after 2021, companies won’t be able to immediately expense costs that are treated as specified R&D expenditures. Instead, they’ll be required to capitalize US-based research expenses and deduct them over a five-year period. Expenses incurred for research performed outside of the United States will be deducted over a 15-year period.
Other Key Provisions
The following tax law changes will also have a significant impact on Washington State businesses and their owners.
Effective January 1, 2018, the corporate income tax rate will fall to 21% from 35%.
There’s now full expensing for new and used qualified property placed in service after September 27, 2017, and before 2023
The domestic production activities deduction is repealed for years beginning after 2017.
The deductible portion of dividend received from domestic corporations is reduced.
There’s now a limitation of nonrecognition of gain from like-kind exchanges to exchanges involving real property, effective for exchanges completed after 2017.
Deductions for interest expenses will be limited to 30% of earnings before interest, taxes, depreciation, and amortization through the 2021 tax year.
Net operating loss (NOL) deductions will be limited to 80% of taxable income for NOLs arising in years beginning after 2017. Carrybacks of NOLs will be eliminated for most taxpayers, while there will be indefinite carryforwards for losses arising in tax years ending after 2017.
Nonrepatriated foreign earnings will be taxed immediately at a rate of 15.5% for liquid assets and 8% for illiquid assets, while allowing a 100% dividends-received deduction on qualifying dividends paid by controlled foreign corporations (CFCs) to US corporate shareholders that own at least 10% of the CFC.
Star Fischer has practiced public accounting since 2001 and provides R&D tax services to middle-market companies. She can be reached at (425) 303-3132 or firstname.lastname@example.org. Tom Sanger has practiced public accounting since 1994 and leads the R&D Tax Services group at Moss Adams. He can be reached at (425) 303-3190 or email@example.com. Assurance, tax, and consulting offered through Moss Adams LLP. Investment advisory services offered through Moss Adams Wealth Advisors LLC. Investment banking offered through Moss Adams Capital LLC.