Tax Cuts and Jobs Act Impact to Business Credits
The Tax Cuts and Jobs Act makes changes to the general business credit by adding a new component credit for paid family and medical leave, and changing two current component credits, i.e., the rehabilitation credit and the orphan drug credit.
New component credit for paid family and medical leave
First, the tax reform introduces a new component credit for paid family and medical leave, i.e., the paid family and medical leave credit, which is available to eligible employers for wages paid to qualifying employees on family and medical leave. The credit is available as long as the amount paid to employees on leave is at least 50 percent of their normal wages and the leave payments are made in employer tax years beginning in 2018 and 2019.
That is, under the tax reform, the new credit is temporary and won't be available for employer tax years beginning in 2020 or later unless Congress extends it further. For leave payments of 50 percent of normal wage payments, the credit amount is 12.5 percent of wages paid on leave. If the leave payment is more than 50 percent of normal wages, then the credit is raised by .25 percent for each 1 percent by which the rate is more than 50 percent of normal wages.
So, if the leave payment rate is 100 percent of the normal rate, i.e., is equal to the normal rate, then the credit is raised to 25 percent of the on leave payment rate. For purposes of the credit, the maximum leave allowed for any employee for any tax year is 12 weeks.
Rehabilitation credit for qualified rehabilitation expenditures
Eligible employers are those with a written policy in place allowing (1) qualifying full-time employees at least two weeks of paid family and medical leave a year, and (2) less than full-time employees a pro-rated amount of leave. Qualifying employees are those who (1) have been employed by the employer for one year or more, and (2) in the preceding year, had compensation not above 60 percent of the compensation threshold for highly compensated employees under the qualified retirement plan rules. Paid leave provided as vacation leave, personal leave, or other medical or sick leave is not considered family and medical leave.
Second, the Tax Cuts and Jobs Act changes the rehabilitation credit for qualified rehabilitation expenditures paid or incurred starting in 2018 by eliminating the 10 percent credit for expenditures for qualified rehabilitation buildings placed in service before 1936, and retaining the 20 percent credit for expenditures for certified historic structures, but reducing its value by requiring taxpayers to take the credit ratably over five years starting with the date the structure is placed in service. Formerly, a taxpayer could take the entire credit in the year the structure was placed in service. A transition rule is also provided for certain buildings owned or leased at all times on and after Jan. 1, 2018.
Orphan drug credit for clinical testing expenses
Third, the tax reform also makes significant changes to another component credit of the general business credit, i.e., the orphan drug credit for clinical testing expenses for certain drugs for rare diseases or conditions. For clinical testing expense amounts paid or incurred in tax years beginning in 2018, the former 50 percent credit is cut in half to 25 percent. Taxpayers that claim the full 25 percent credit have to reduce the amount of any otherwise allowable deduction for the expenses regardless of limitations under the general business credit. Similarly, taxpayers that capitalize, rather than deduct, their expenses have to reduce the amount charged to a capital account. However, the Tax Cuts and Jobs Act gives taxpayers the option of taking a reduced orphan drug credit that, if elected, allows taxpayers to avoid reducing otherwise allowable deductions or charges to their capital account. The election for the reduced credit for any tax year must be made on a tax return no later than the time for filing the return for that year (including extensions) and in a manner prescribed by IRS. Once the reduced credit election is made, it is irrevocable.
If you wish to discuss any of these credits in more detail and the options you may have for your business, please contact us.