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Inflation Reduction Act & CHIPS Act - How They Affect The R&D Credit

August 18, 2022

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Jonathan Cardella

Strike Summary

  • There are certain restrictions when taking advantage of both Sections 174 deduction/capitalization and Section 41, which can be seen in Section 280C.
  • Businesses that choose to elect Section 280C for their federal taxes could also lower their state taxes as well.
  • Taxpayers that want to use Section 280C must plan ahead because it can only be used on an originally filed return.
  • The recent passage of the Tax Cuts and Jobs Act may have have affected whether a taxpayer should use Section 280C in their tax strategy.

Work with Strike to navigate tax changes with ease.

Schedule a MeetingBook a Consultation

Strike Summary

  • For the first time in seven years, legislation has changed the R&D tax credit (and for the better!).
  • Qualified small businesses can claim an additional $250,000 to offset payroll tax liabilities.
  • Innovators in the semi-conductor industry have $13.2B for R&D efforts.

As tax laws are always changing, we aim to keep our clients informed and up-to-date on all legislative changes. Recent legislation passed in both chambers of Congress, the CHIPS Act and the Inflation Reduction Act, could have a significant impact on R&D claims.

Strike is actively looking into these credits and how we can best support our clients, partners, and network, but here’s what we know so far. 

The CHIPS Act and What It Means for R&D

After 18 months of negotiations, Congress passed the Creating Helpful Incentives to Produce Semiconductors (CHIPS) Act on July 27, 2022. The bill was signed into law on August 9th by President Biden, marking a significant investment by the federal government to stay competitive in the $550B industry.

The CHIPS Act allocates $280B targeted toward different parts of the semiconductor industry, including manufacturing, research and development, and workforce development.

Accordingly, Congress has set aside $52.7B for semiconductor research, including:

  • $39B for domestic manufacturing
  • $13.2B for research and development and workforce development
  • $500M for international information communications technology security and semiconductor supply chain activities

Like any other industry, companies in the semiconductor industry only need to create something new to them while adhering to the 4-part test in order to claim the credit. 

The Inflation Reduction Act and What It Means for R&D

The Inflation Reduction Act of 2022, replacing the previously House-passed, Senate-stalled Build Back Better Act (BBBA; H.R. 5376), has been signed into law. The Inflation Reduction Act aims to support efforts in healthcare, taxes, energy, and national inflation. 

A small portion of this act will amend existing R&D payroll tax credit provisions allowing startups to now claim an additional $250,000— doubling the amount to $500,000 per year—that qualified small businesses can use to offset their payroll tax liabilities. This change in payroll tax credit is only applicable to taxable years beginning after December 31, 2022 (i.e. just the 2023 tax year).

This is pretty exciting because it's the first time in seven years that the R&D credit has been altered by legislation, and more legislation is in the works to increase it even more (like the FIRST Act). 

The fine print matters on newly passed bills like these. On the surface, the Inflation Reduction Act of 2022 looks like a win for companies who claim the R&D tax credit. We will continue to pore through the details so you don’t have to, and our team is on standby to answer any questions you may have as to whether this new legislation affects your potential credit amount.

Future Tax Updates

Strike will continue to stay abreast of these new laws and how our clients can leverage them to continue refueling innovations in their business. We make it easy to navigate confusing and complex bills, thanks to our dedicated and experienced team of tax credit specialists. Like other tax professionals, we’re still working through the fine print, but we will let you know if anything significant happens. If you’re concerned about how these two new laws will affect your business, contact us. We know that your individual circumstances need more studious review than FAQs and blog posts to truly understand how to maximize your tax credits. Follow us on LinkedIn for future updates.

Work with Strike to navigate tax changes with ease.

Schedule a MeetingBook a Consultation

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