The PATH Act One Year Later: Public Companies Taking Advantage of R&D Tax Credits

March 2017

The passage of the Protecting Americans from Tax Hikes Act of 2015 (PATH Act) put an end to the tumultuous history of the federal research and development (R&D) tax credit after decades of repeated expirations and renewals at the eleventh hour or even later. The PATH Act permanently extended the credit while expanding it to benefit startups and small business. This allowed tax executives to include the credit in their long-term business planning without concerns about expiration.

In the year following the implementation of the PATH Act, the survey found that use of the credit grew. Eighty-two percent of tax executives surveyed make use of some form of R&D credit, up from 75 percent in 2016. The majority (64 percent) use both federal and state credits, while one in three (33 percent) claim only the federal credit.

For the 18 percent of those surveyed who said they do not use any form of R&D credit, half believe they are not doing “groundbreaking” work. It is important to note that the credit doesn’t require activity to be groundbreaking to qualify, or even that the activity succeed. Instead, in general, it requires only that the activity attempt to develop or improve the functionality or performance of a product, process, software, or other component.

Interestingly, concerns over the cost to pursue the credit dropped significantly, from nearly half of respondents (44 percent) in 2016, to just 13 percent. This drop may be attributable to an increased level of comfort in annually claiming the now-permanent federal credit.

Despite the increasing number of R&D credit claims, more executives this year say they are not reporting them due to audit concerns (18 percent), up from 13 percent last year. Worry over the alternative minimum tax bar and documentation requirements both dropped to 13 percent, compared to 22 percent each in 2016. 

“Now that the PATH Act has been in effect for a full year, we’re seeing more businesses work the permanent federal R&D credit into their tax planning strategies. A lot of startups and smaller businesses are using the credit to offset up to $250,000 of their payroll taxes or against their AMT; and with the potential to save up to 15 percent of qualified spending, companies of all sizes are using the credit to increase their cash flow. If your company is financing attempts to develop better, faster, cheaper or greener products, processes, software or other components, they would be well advised to look at the federal R&D credit and the myriad of related state and local credits and incentives designed to promote such investments, to ensure they’re not leaving money on the table.” - Chris Bard, national leader for Specialized Tax Services, Research and Development at BDO