Posted by Jeffrey Feingold on 01.11.24
In 2022, the Inflation Reduction Act (IRA) was signed into law. It's a 10-year plan designed to improve a range of tax laws, upgrade technology and simplify the filing of tax returns. Most media coverage surrounding the signed Inflation Reduction Act (IRA) focused on its health care and climate change sections. However, the measure also improves a frequently disregarded federal tax credit for qualified small businesses. The Inflation Reduction Act of 2022 ("IRA") has increased and modified the qualified small business payroll tax credit for increasing R&D activities.
The Protecting Americans from Tax Hikes (PATH) Act of 2015 enacted IRC 41, which allow a qualified small business to elect to apply a portion of the research credit for the taxable year as a payroll tax credit against the employer portion of the old-age, survivors, and disability insurance tax ("social security tax") under the Federal Insurance Contributions Act. IRC Section 41 creates incentives for increased R&D activities in the form of tax credits for companies involved in qualified research activities. This election is designed to benefit an eligible startup that has little or no income tax liability. The IRS extended the transition period for taxpayers to perfect their refund claims for R&D Tax Credits through January 10, 2024. The transition period was initially listed at 30 days and was set to expire on January 10, 2023. Taxpayers are now provided 45 days to perfect a research credit claim for a refund prior to the IRS’s final determination on the claim, according to the IRS.
R&D tax credits are available for companies large and small that develop new or improved products, processes or software. While more than 40 states also offer R&D credits, Federal credits get most of the attention. As an example, Section 41 of the Internal Revenue Code allows for one of the largest tax benefits to companies a tax credit incurred for “qualified research expenses.” This credit is applied against income tax liability as a general business credit under IRC Sec. 38. However, for qualified small businesses, companies can now offset these credits against certain payroll taxes. Previously, the maximum amount that could be elected for such use was $250,000. Now, qualified businesses can apply up to $500,000 of their R&D Tax Credit against their payroll tax liability starting from the tax years after December 31, 2022!
Find Out if Your Industry Qualifies
The R&D credit can be a lucrative incentive for innovative businesses. Given these changes and the new permanent nature of the tax credit, now is the time to consider whether activities performed by your company qualify for major cash-saving tax credit opportunities in 2024. Consider making the R&D tax credit part of your long-term strategic planning and make sure you’re not leaving money you’ve earned on the table. To learn more about whether your industry and company activities qualify for the R&D Tax Credit, request our free assessment today.
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, call us at (800) 260-4138 or please leave us a message below.
