Small businesses are critical to the recovery of our ailing economy. They employ nearly half of all Americans and have historically led the way in post-recession job creation. For manufacturers, who contribute higher-paying jobs on average, help may be on the way.
The Small Business Jobs Act, passed by the Senate Thursday, aims to bolster small business hiring by facilitating access to capital and encouraging investment. Manufacturers with revenues under $50 million should pay close attention to one feature of the act -- the elimination of the AMT (Alternative Minimum Tax) barrier when it comes to business tax credits.
This rights a long-standing wrong in the tax code that has prevented well-deserving small businesses from realizing the value of federal tax incentives, most notably, the research & development tax credit.
Virtually all manufacturers, even if their production is contracted abroad, are eligible for the R&D credit. The credit encourages American businesses to expand and retain high-value design, engineering and development jobs by reducing the cost of employing people (here in the U.S.) who are involved in the creation and improvement of products and processes.
There are more than 30,000 manufacturers nationwide with $5 million to $50 million in revenue. Based on a study of IRS data, however, less than 10 percent of those are claiming the credit. Why?
Aside from those companies that don't claim the credit because they overestimate its qualifying limitations and underestimate its value, there are many that simply can't use the credit because of its inability to reduce AMT. Thus, a business could be generating substantial tax credits and paying a healthy amount of tax, but won't be able to use the credits to offset that tax. This makes little sense.
The Small Business Jobs Act would eliminate this restriction for 2010, allowing taxpayers, whether in an AMT position or not, to lower their tax due by the full value of available credits. The bill also provides extended carryback terms for any unused general business credits. Under current law, unused credits may be carried back to the preceding tax year only. The Act would extend the carryback period to include the five preceding years, providing taxpayers the opportunity to claim significantly larger refunds.
For a typical small manufacturer with about $30 million in revenue, the federal R&D credit can range from $100,000 to $200,000 or more. Even if the business lost money during the current recession and is not paying tax, it can apply those credits as far back as 2005 to claim refunds. Of course, this requires Congress to grant an extension of the R&D credit, which technically expired at the end of 2009. Most experts expect it to be passed retroactive to January 1 of this year.
Brandon Edwards is president of The Tax Credit Company, which represents Fortune 500 companies, and small and midsize companies in maximizing the value of tax incentive programs.
More about the R&D Credit:
R&D Tax Credit Update: http://www.researchcreditupdate.com
R&D Credit Coalition: http://www.investinamericasfuture.org/
IRS: http://www.irs.gov/businesses/article/0,,id=101382,00.html