In December 2015, the Protecting Americans from Tax Hikes Act of 2015 (PATH Act) made three important changes to the research and development (R&D) tax credit, at least one of which could significantly impact startup and pre-revenue companies.
Qualifying small businesses can now use a portion of the R&D credits they generate against the 6.2% payroll tax imposed on business wage payments to employees. This was not an option prior to the PATH Act, meaning companies not yet generating income could carry forward their R&D credits but couldn’t use them in the current year.
A qualified small business is defined as a partnership or corporation with:
The same rules apply for sole proprietors, except gross receipts include receipts from all trades or businesses.
Once it has been determined that your business is a qualified small business and generating an R&D credit, the process of claiming the credit is relatively simple. Here are the forms you will need:
The portion of the credit that is being used to offset the employer’s portion of taxes is applied to the first calendar quarter after the income tax return containing the election is filed. For example, a qualified small business that made the payroll tax credit election on their 2016 tax return that was filed on March 15th would apply the portion of the payroll tax credit to their 2017 second quarter payroll tax return.
The amount of the R&D credit a qualifying business can elect to allocate against payroll taxes is the smaller of:
Keep in mind, the payroll tax credit can only be used against the employer portion.
The R&D credit with a payroll tax credit election can be a powerful tool for a qualified small business. It allows the business to receive benefits from the R&D credit sooner, rather than waiting until there is revenue to offset. If you conduct R&D activities and think your business is a qualified small business, speak with your tax advisory team to discuss the option of electing the payroll tax credit.
Contact Josh Messina at jmessina@cohencpa.com or a member of your service team to discuss this topic further.
Cohen & Company is not rendering legal, accounting or other professional advice. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts and circumstances.