FORWARD ActNews & UpdatesTax Credits

Moving F.O.R.W.A.R.D.

By May 12, 2020

In early May 2020, a new bill was introduced to the United States Senate by several Senators, including, Senators Chris Coons (D-DE), Pat Roberts (R-KS), Catherine Cortez Masto (D-NV), Todd Young (R-IN), Margaret Wood Hassan (D-NH), and Steve Daines (R-MT). Senate Bill 3593, entitled the “Forward Act”, the proposed legislation expands the current R&D Tax Credit and provides additional incentives for certain qualified manufacturers. 

The bill is currently under review by the Senate Finance Committee; however, a draft of the proposed legislation has been published on Sen. Coon’s website. The following proposed changes would be effective for tax years beginning after December 31, 2019, allowing for much needed long-term tax relief at a time where every dollar can be a factor in keeping a business alive and employees on the payroll. 

Treatment of Qualified Small Businesses 

Under the 2015 PATH Act, Qualified Small Businesses (“QSBs”) could offset the FICA portion of their payroll taxes through the R&D tax credit, provided they had gross receipts for the current tax year less than $5 million, and no gross receipts for any tax year before the five year tax period starting with the current year. If a QSB met these requirements, the taxpayer could elect to offset up to $250,000 per year of FICA. Finally, C-corps were required to use its R&D credits to offset income tax first before offsetting payroll taxes. 

Under the FORWARD Act, the definition of a QSB is expanded to include entities with gross receipts for the current year of less than $20 million, and no gross receipts in excess of $25,000 for any tax year before the eight year period ending with the current year. The proposed changes also include changing the $250,000 per year limitation to $1,000,000 per year and eliminates the C-corp restrictions. 

2015 PATH Act Proposed 2020 FORWARD Act

Gross Receipts for Current Year

      Less than $5 million

Less than $20 million 

Gross Receipts for Prior Years

No gross receipts for any tax year prior to the 5-year tax period 

No gross receipts for any tax year prior to the 8-year tax period

C-Corp Restrictions

Must first apply credits to income tax before offsetting payroll taxes

Eliminated

Maximum offset per year $250,000

  $1,000,000

 

Qualified United States Manufacturers 

Impacts from COVID-19 virus are still very much unknown, but one thing has been abundantly clear – in the event of a global catastrophe, supply chains can break down very quickly and disrupt the entire global economy. The new legislation proposes a bonus R&D tax credit rate for certain manufacturers with domestic gross receipts contributing more than 50% of total gross receipts. The theory behind this is to incentivize manufacturers to keep manufacturing in the United States instead of moving production and manufacturing plants overseas where labor is often more affordable.

 

Domestic Gross Receipts Percentage

Regular Credit Bonus Rate (Total Rate) Alternative Simplified Credit (“ASC”) Bonus Rate (Total Rate) ASC if no qualified research expenses in any of the 3 prior years Bonus Rate (Total Rate)

>50% but <60%

1% (21%)  0.7% (14.7%) 

0.3% (6.3%)

>60% but <70% 

2% (22%)  1.4% (15.4%) 

0.6% (6.6%)

>70% but <80% 

3% (23%)  2.1% (16.1%) 

0.9% (6.9%)

>80% but <90% 

4% (24%)  2.8% (16.8%) 

1.2% (7.2%)

>90% 5% (25%)  3.5% (17.5%) 

1.5% (7.5%)

 

Expanded Qualified Research Activities Definition 

Under the current law, the definition of qualified activities excludes time spent training a new employer engaged in R&D. Under the proposed legislation, this has changed. The definition will expand to include time spent training the employee to perform qualified services, including engaging in qualified research, or engaging in the direct supervision or support of research. This provision would incentivize companies to continue to hire technical personnel and increase the total wage qualified research expenses taken toward the credit, effectively increasing the amount of credits available. 

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