On May 4th, 2020, Delaware Senator Chris Coons presented a piece of legislation, S. 3593, the “Furthering Our Recovery With American Research & Development Act” – more commonly referred to as the FORWARD Act. The bill proposes numerous amendments to Internal Revenue Code § 41 (or IRC 41). Within the FORWARD Act, there are two very distinct improvements, one of which provides R&D Tax Credit relief, while the other alleviates some of the pressure of Qualified Small Businesses (QSB). If the FORWARD Act is signed into law, it will allow QSBs and C-Corps to expand upon or introduce newly qualified practices, which in turn creates stronger, more secure businesses.
Redefining Qualified Small Businesses
Revisions to IRC 41 under the PATH Act of December 2015, presented a few challenges for QSBs. The original code stated that after a gross receipt of any kind, QSBs would begin their 5-taxable-year period, providing they do not report gross receipts exceeding $5,000,000 at any point between the beginning and end dates of that period. This has been especially challenging for QSBs, particularly startup companies that typically report zero earnings for the first few years and are dependent on loans and the interest they accrue through the banks. Thankfully, the FORWARD Act proposes immediate amendments that serve only to benefit the QSB.
The first two amendments look to establish a minimum and increase maximum threshold amounts for gross receipts. Those adjustments would introduce $25,000 minimum gross receipts before the taxable-year period begins, and an increase from $5,000,000 to $20,000,000 before that period would end. However, it also extends the time frame to an 8-taxable-year period. By redefining QSBs, the cap on the R&D tax credit will increase, which could be applied against some payroll tax, raising it from the initial $250,000 to $1,000,000. All these changes would apply to taxable-year periods starting after December 31st, 2109. With these amendments, small businesses would be able to maintain their existing qualification for an extended period while simultaneously increasing their earnings without having to monitor the annual threshold.
New R&D Tax Credit Qualifications and Thresholds
The other significant amendment includes the qualification of two new kinds of R&D expenses: employee training expenses and expenses accrued by ongoing (previously qualified) research conducted within the business, including research that may be outsourced. Even though there are only a few specific expenses outlined within the proposal, should the FORWARD Act be signed into law, its broader definition would provide more qualified expenses to be figured in while calculating the R&D tax credit.
Additionally, the FORWARD Act proposes some modifications to the Alternative Simplified Credit (ASC) under a new subsection at the end of the bill titled “Special Rules for Certain High-Benefit Research Activities.” This subsection would see the regular credit rate increased to 25%, the elected ASC rate to 17.5%, and the rate for credit on non-qualified research expenses for the prior three years to 7.5%. Those who collaborate with federal laboratories, educational institutions, and specific kinds of research organizations might be eligible for these credit rates. However, the bonus rate is conditional in that each organization involved in the collaboration needs to provide greater than half of what would be considered proportional work (pro-rata) in order to receive and maintain the ASC bonus.
The FORWARD Act brings much to the table and provides some much-needed relief and expansion during a global pandemic. This bill would further incentivize businesses – both small and large – to invest their time and money into ongoing R&D projects and perhaps start new ones under the expanded definitions provided. There has not been any movement on the bill as of late; however, we at PMBA will continue to bring material legislative updates as they become available. The time for innovation is now.
Are you taking full advantage of R&D Tax Credits? Find out today by accessing our free R&D Tax Credit Calculator.
About the Author
Our R&D Credit Team is led by Peter J. Scalise, a highly renowned thought leader with over twenty years of experience in identifying, gathering, and documenting Federal and State R&D Tax Incentives. Peter’s background extends from servicing privately-held startup companies to publicly-held Fortune 100 conglomerates.