In response to a perceived economic slowdown and job outsourcing becoming more commonplace, 1981 marked the original enactment of the federal R&D Tax Credit. The credit was developed to reward American businesses for keeping technical jobs within the country as well as driving innovation within their industry. Activities for qualifying for the credit were limited to creating or producing a product or process that was new to the world according to what was referred to as the “Discovery Rule”.
Initially proposed in 2001, and finalized in 2003, were the regulations to eliminate the “Discovery Rule” in qualifying for the R&D Tax Credit. This modification was beneficial to businesses as it expanded what activities could qualify for the credit. Instead of being “new to the world”, activities now only had to be “new to the taxpayer”, thereby lowering the threshold to qualify and opening the credit’s availability to new industries.
In 2006 the Alternative Simplified Credit (ASC) was enacted, providing additional flexibility to businesses in calculating credit amounts and the ability to change the baseline calculations for the credit.
First proposed in 2013, Section 174 regulation changed the way controlled group credits are allocated amongst members. Later finalized in 2014, Section 174 regulations put into effect that if supply costs are incurred for the development of a pilot model, the ultimate disposition of the pilot model is irrelevant. Additionally, temporary regulations allowed ASC on amended returns for years that a taxpayer had not previously claimed a credit.
The end of 2015 marked the passing of the Protecting Americans from Tax Hikes Act (PATH Act) that officially made the R&D Tax Credit a permanent addition to the U.S. tax code. Additionally, the AMT (Alternative Minimum Tax) turn off was enacted for businesses with $50 million or less in gross receipts allowing for more companies than ever before to take advantage of the incentive.
Tax reform legislation is implemented and the R&D Tax Credit remains one of the most lucrative tax incentives for U.S. businesses, with the legislation further loosening AMT restrictions for S-corps and C-corps.