Regulations Needed to Clarify Operation of Expanded Research Credit for Small Business Start Ups under PATH Act, AICPA Tells IRS

February 23, 2017

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The American Institute of CPAs (AICPA) recommended that the Internal Revenue Service (IRS) and the U.S. Department of the Treasury issue clarifying regulations regarding the expansion of research credit benefits.  The research credit benefits were mandated by the Protecting Americans from Tax Hikes Act of 2015 (the PATH Act), to offset certain payroll tax liabilities of start-up companies engaged in qualified research activities.  The AICPA’s February 1 letter also commented on the designation of the credit as a “specified credit” that is used to offset the alternative minimum tax (AMT) liability of an eligible small business.

“The expansion of the research credit regime, as part of the PATH Act for start-up companies with payroll tax liabilities, as well as AMT taxpayers, is an important opportunity for many small businesses performing qualified research to realize a financial benefit from claiming the research credit for the first time,” Annette Nellen, CPA, CGMA, Esq., chair of the AICPA Tax Executive Committee, wrote.

The AICPA’s recommendations “will help clarify the operation of the new rules and are consistent with the intent of Congress that the research credit provide a current economic benefit to a broad class of start-up ventures and small businesses,” Nellen stated.

The AICPA urged that regulations or other guidance be issued to:

  • define “gross receipts” for the purposes of section 41(h);
  • clarify the order of the elections that are made under sections 41(h) and 280C(c)(3);
  • clarify that a taxpayer is eligible to make the section 41(h) election for its current taxable year (i.e., the “credit year”) even if it has $5 million or more in gross receipts in one or more of the four taxable years immediately preceding the credit year;
  • clarify the application of the general business credit carryforward provisions of section 39(a) to the credit authorized by section 3111(f), and the limitation imposed under section 41(h)(2)(C);
  • specify that the section 383 limitation on the section 41 credit does not apply to the credit authorized under section 3111(f);
  • identify the mechanics of the section 3111(f) credit and the applicable penalty regimes that apply in the event of a recapture of the payroll tax credit and provide transitional penalty relief;
  • coordinate the election under section 41(h) with Treasury regulations published in May 2016 regarding Certified Professional Employer Organizations;
  • clarify the applicable dates for which the section 41 credit is a “specified credit” available to offset certain AMT liabilities; and
  • establish automatic consent procedures to revoke the section 41(h) election.