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April 2016

Dissecting how the PATH Act Influences the R&D Tax Credit

The tax community is fully aware by now that the passage of The Protecting Americans from Tax Hikes Act of 2015 (PATH Act) made many temporary tax laws permanent, including the Research & Experimentation Tax Credit (R&D Tax Credit). Today, McGuire Sponsel would like to take some time to review some of the more technical and lesser known details of the PATH Act and how they affect the R&D Tax Credit.

For tax years beginning after December 31, 2015, the R&D Tax Credit Small Business Provision allows eligible businesses to claim the R&D Tax Credit against alternative minimum tax (AMT). Eligible small businesses are defined as corporations, partnerships, or sole proprietorships that have average annual gross receipts of less than $50 million over the three year period prior to the current tax year.  This is similar to the provision that was enacted for the 2010 tax year and benefits a significant number of closely-held businesses and their shareholders.

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Can an IC-DISC Commission be Calculated when the Client has a Net Loss?

Mark O'Dell

From time to time the question comes up if it is possible to calculate or even take a deduction for an IC-DISC commission during a year in which the supplier company is experiencing a net loss.  Most practitioners are generally aware of the prohibition of an IC-DISC "causing a loss to its related supplier," but are unclear as to its application and operation.

According to the Treasury Regulations, the broad framework states that neither the gross receipts method nor the combined taxable income method of calculating an IC-DISC commission may be applied to "cause in any taxable year a loss to the related supplier," but either of these methods may be applied to the extent it does not cause a loss.  However, a loss to a related supplier will only result if the taxable income of the IC-DISC exceeds the combined taxable income (CTI) of the related supplier and the IC-DISC. The CTI of an IC-DISC is determined by taking the gross receipts of export property less the total costs of the IC-DISC and related supplier which relate to such gross receipts.  

Fixed Asset and Depreciation Opportunities Created by the PATH Act

Justin Gephart

The Protecting Americans from Tax Hikes Act of 2015 (PATH Act) extended and made permanent many expiring tax provisions. Unlike prior legislation that worked on a retroactive basis, the PATH Act allows taxpayers to engage in proactive tax planning. In a previous article, McGuire Sponsel detailed the effects that the new act has on Fixed Assets and Depreciation. Today, however, we would like to highlight a few potential opportunities that are created by merging multiple strategies present in the PATH Act.

The new act extended and made permanent the Section 179 $500,000 expensing limit and the $2 million phase out. All too often, we have seen the Section 179 expense applied only to equipment. While this is technically correct, tax savings could be left on the table. Under Section 179, a taxpayer is allowed to expense qualified real property if it meets the criteria of a Qualified Leasehold Improvement, Qualified Restaurant Property or Qualified Retail Improvement Property. The professionals at McGuire Sponsel would recommend taking the expense against any qualified real property. This reduces the basis of the 15-year property instead of the shorter, 5 or 7-year personal property. The taxpayer can then claim bonus depreciation on the remaining eligible assets and capture the remaining basis over the shorter 5 or 7 year life.

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