The research and development tax credit has been a great tax savings incentive to companies looking to increase their internal research and development activities. When President Obama signed the Protecting Americans from Tax Hikes (PATH) Act on December 18, 2015, the research and development (R&D) credit was finally made permanent (retroactively as of January 1, 2015). In addition, the credit now contains two new options for utilization that did not previously exist which broadens the impact of the credit for many small to mid-sized businesses.

Two New Provisions

Previously, the R&D tax credit could only be used to offset regular tax; this rule limited many small to mid-sized businesses in their ability to use the credit if they were subject to the alternative minimum tax (AMT). Beginning in 2016, businesses with less than $50 million in gross receipts will be free to use the credit to offset AMT.

In addition, certain start-up businesses (with less than $5 million in gross receipts) that may not have an income tax liability will be able to offset payroll taxes with the credit to the tune of $250,000. No longer will they have to wait until they generate taxable income to take advantage of the credit savings.

Four Part Test

Businesses should be aware of the four part test that research activities must pass before the corresponding expenditures related to those activities will qualify for the tax credit. The four part test is as follows:

1. The R&D activity must be intended to be useful in the development of a new or improved business component for the taxpayer, such as a product, process, technique, formula, invention or software.
2. The project must be undertaken for the purpose of discovering information that is technological in nature. Thus, the activity must rely on the principles of physical sciences, such as engineering, biology or computer science.
3. The project must be intended to eliminate uncertainty related to the development or improvement of a business component. Uncertainty can include the capability, development method or optimal design of the business component.
4. The project must evaluate one or more alternative solutions through the development, refinement and testing of different options. Furthermore, technical risk must be present, which means that there is a chance the project will not be successful.

If you are planning on claiming an R&D tax credit on your business’ next tax return, please consult your tax advisor.  Although the benefits of the R&D credit make it attractive, now more than ever, you will want to make certain that you meet the requirements because it has become one of the most heavily audited tax credits by the IRS in recent years. 

In many parts of the country, autumn means a drop in temperatures and leaves turning color. But no matter where you live, it also means heading back to school. For college students and those who love them, that means tuition payments and other fees. The good news is that there are a variety of ways to handle these expenses in a tax-savvy manner.

Consider credits

Tax credits reduce tax liability dollar-for-dollar, so let’s start here.

American Opportunity Tax Credit
The American Opportunity Tax Credit (AOTC), which was extended through December 2017 by the American Taxpayer Relief Act of 2012, can be worth up to $2,500 per eligible student. However, it is only available for the first four years of post-secondary education and applies to qualified expenses such as tuition and fees, course-related books, supplies, and qualified equipment. The full credit is generally available to eligible taxpayers whose modified adjusted gross income (MAGI) falls below $80,000 for singles or $160,000 for married couples filing jointly.

Lifetime Learning Credit
Another tax break to look into is the Lifetime Learning Credit. It can be applied to any and all years of higher education, though it can’t be used concurrently with the American Opportunity credit. In 2015, a taxpayer may be able to claim a Lifetime Learning Credit for up to $2,000 for qualified expenses paid for a student enrolled in an eligible educational institution. The same $80,000/$160,000 MAGI limit applies.

Deduce your deductions

• Tuition and fees: Tax deductions are also available for some college-related expenses. For example, eligible taxpayers can currently write off up to $4,000 in tuition and fees. Generally, this deduction can only be claimed by those who make qualified higher education expenses for an eligible student below the $80,000/$160,000 MAGI limit mentioned above.
• Student loan interest: Taxpayers with MAGI of less than $75,000 as single filers or $155,000 as married joint filers may be able to deduct interest paid on a student loan used for higher education during the coming year. The student loan deduction can reduce the amount of income subject to tax by up to $2,500 — even for those who don’t itemize.

Bear in mind that you can’t claim the tuition and fees deduction for the same student in the same year that you claim the American Opportunity credit or the Lifetime Learning credit. Taxpayers must take the credit or the deduction based on which is more beneficial.

What expenses qualify

Qualified expenses for the two credit options or tuition deduction are amounts paid for tuition, fees, and other related expenses required for enrollment or attendance at an eligible educational institution. For the AOTC only, you may also claim the cost of books, supplies, and equipment as qualified expenses. For the student loan interest deduction, the loan is allowed to cover all of the above as well as room and board and other necessary expenses like transportation. Be careful though; room and board is only allowed for the student loan interest deduction.

Get specific

The tax breaks mentioned here may apply to you, your spouse or a dependent for whom you claim an exemption on your tax return. Ask your tax advisor about what best fits your specific situation.