The current hubbub around tax reform is the peculiar decision to keep the corporate alternative minimum tax. In brief, the alternative minimum tax system is a different tax system that removes special tax treatment for certain items under the belief that savvy businesses and individuals that make money should have to pay something in tax. Currently, the maximum effective tax rate for corporations is 35% and the AMT tax rate is 20%, leaving a spread of 15%. Ultimately, companies pay tax at a rate closer to the 20% after taking advantage of special tax items like the research tax credit, immediate expensing, and other tax items.
In the current legislative battle, the House removed the corporate AMT and the Senate reinstated the corporate AMT. The curious decision was the Senate held the corporate AMT at the same reduced tax rate of 20%. The decision effectively means the tax rate is a flat 20% with no wiggle room. So the result is all specialty tax incentives are rendered useless, right?
Not so fast. Some clarifications are in order. First, the 20/20 regular and AMT tax rate applies to C Corporations. S Corporations and other pass through income are still subject to rules of personal income taxation which retain higher tax rates (35%) for wealthy individuals and business owners. Second, the PATH Act of 2015 is still in place which returns essential tax protections for small businesses and startups.
Eligible small businesses (C-Corps, S-Corps, LLCs, Partnerships, etc) are able to offset their tax liability below AMT levels provided the company has not earned more than $150 million in gross receipts over the last 3 years. In addition, startups (defined as company 5 years old or younger) are still able to offset payroll tax obligations. So the upshot is really for smaller companies that are actually driving innovation. If your company is a startup or a small business (under $50 million in revenue), you are able to take full advantage of the research tax credit. Please contact Indago with any technical questions or to assess your eligibility under the new tax law.