IRS Guidance: Small Business R&D Credits and Payroll Taxes

IRS Guidance: Small Business R&D Credits and Payroll Taxes

Posted by Jeffrey Feingold on 04.06.17

New IRS guidance, Notice 2017-23, eases the way for small businesses to benefit from a new option that allows them to apply a portion or all of their research and development (R&D) tax credits against their payroll tax liability, rather than their income tax liability.

Under the Protecting Americans from Tax Hikes Act of 2015 (PATH), startups, as well as some established small businesses that develop and test new products, can qualify for the R&D tax credit. In the past, a company had to generate a profit and pay income taxes before it could claim the credit. Now business startups and new businesses that meet certain qualifications may be eligible to apply the R&D credit against payroll taxes for up to five years.

The new payroll offset is available to businesses that meet the following qualifications:

  • Less than $5 million in annual gross receipts in 2016, and each subsequent year the credit is elected
  • No more than five years of gross receipts
  • Qualifying research activities and expenditures

The maximum benefit an eligible company is allowed to claim against payroll taxes each year under the new law is $250,000.

See related blog: PATH Expands R&D Credit Eligibility for Startups and Small Businesses

Specifics

Notice 2017-23, posted last week on IRS.gov, provides additional clarification to small businesses on the definition of “qualified small business” and includes instructions for determining gross receipts for purposes of the IRS code. Further, the guidance spells out how and when to make the payroll tax credit election and claim the credit.

A small business can claim the payroll tax by completing Form 6765, Credit for Increasing Research Activities, and attaching it to a timely filed business income tax return. The guidance also makes allowances for businesses that have already filed this season to still opt for the new choice by filing an amended return by Dec. 31, 2017.

Once a small business chooses the payroll option, it can claim the payroll tax credit by completing Form 8974, Qualified Small Business Payroll Tax Credit for Increasing Research Activities, which needs to be attached to a payroll tax return.

Public Comment

The IRS has requested public comment on this interim guidance, as well as other payroll tax credit issues. Comments may be submitted by July 17, 2017.

Find Out if Your Activities Qualify

The R&D tax credit can be a lucrative incentive for small businesses. Now is the time to consider whether activities performed by your company qualify for major cash-saving federal and state tax credit opportunities.

Request a free assessment to determine qualifying R&D tax credit eligibility.

Tax Point Advisors, a firm with expertise in working with small and midsize companies, works with businesses that may qualify for R&D tax benefits. For more information, read our e-book: The Business Owner's Guide to R&D Tax Credits

For more information on the R&D tax credit, please contact your CPA or Tax Point Advisors. 

Tax Point Advisors assists CPAs and their clients in identifying and capturing their maximum federal R&D tax credits, as well as state R&D tax credits. For more information, contact us at (800) 260-4138, or please leave us a message.


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