Posted by Jeffrey Feingold on 04.20.17

(This post has been updated to reflect recent IRS clarification and guidance)

It has been well over one year since Congress enacted legislation making research and development (R&D) tax credits permanent. For years prior to enacting the Protecting Americans from Tax Hikes (PATH) Act of 2015, R&D tax credits relied on periodic extensions that often required retroactive reinstatement.

The PATH Act created permanency for federal R&D tax credits and also added enhancements in the form of offsets to payroll taxes for qualified small businesses and offsets toward alternative minimum tax (AMT) for eligible small businesses. With the many questions surrounding these new enhancements to the now permanent federal R&D tax credits, Tax Point Advisors offers the following clarifications to help business owners understand whether they may utilize the credit.

Payroll Tax Offset

New IRS guidance eases the way for small businesses to benefit from a new option that allows them to apply a portion or all of their R&D tax credits against their payroll tax liability in place of their income tax liability. In the past, a business had to generate a profit and pay income taxes before it could claim the credit. The new payroll offset enhancement for the federal R&D tax credit is available to qualified small businesses under the following qualification guidelines:

• Business has under $5 million in annual gross receipts in 2016 and each subsequent year the credit is elected
• Business has no more than five years of gross receipts; i.e., companies that generated gross receipts prior to 2012 are not qualified
• Maximum credit toward payroll offset is capped at $250,000 against the FICA employer portion of payroll tax per eligible year.
• Payroll tax offsets from the R&D tax credit apply only to qualified R&D costs incurred beginning in 2016
• R&D tax credit must be calculated and shown with payroll offset portion identified and elected on the original 2016 tax return filed before company can begin to offset payroll taxes in 2017; therefore, the payroll offset cannot be taken based on amended returns as of yet.

Under the mechanics of the payroll offset for the federal R&D tax credit, a qualified small business files its 2016 tax return, claims the R&D tax credit and elects a payroll tax offset amount on Form 6765, Credit for Increasing Research Activities. The payroll tax offset then becomes available on a quarterly basis beginning in the first calendar quarter that starts after the business has filed its federal income tax return. The business can then claim the payroll offset on its quarterly payroll tax return (Form 941) and can also carry remaining offset amounts to the following calendar quarter.

AMT Offset

When Congress enacted the PATH Act, the legislation included a provision that benefits eligible small businesses that pay AMT and expanded the impact of the credit for many small-to-midsize businesses. Companies with $50 million and less in average annual gross receipts, based on the three preceding tax years, may apply the R&D credit against the AMT. This was welcome news to shareholders of qualifying pass-through entities, such as S corporations and partnerships with an AMT liability.

The ability to offset the R&D credit against AMT creates a tremendous opportunity for business owners or members of pass-through entities. While the calculation of the credit has not changed, the AMT offset presents a significant increase in the value of the credit and the number of qualified businesses that can benefit from it for years to come. Your accountant or qualified R&D tax credit expert can help you determine whether your business and activities meet the criteria of the test by conducting a tax credit study.

Watch this video: How to Qualify for R&D Tax Credits: The Four-Part Test

Find Out if Your Activities Qualify

The R&D tax credit can be a lucrative incentive for businesses. And given the new permanent nature of the federal tax credit, 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.

You may also contact us at (800) 260-4138, or please leave us a message below.