The Federal Payroll R&D Tax Credit
For startups and small businesses, the federal government offers an opportunity to claim R&D credits against their employer payroll taxes.
Businesses pay 6.2% per employee in FICA social security taxes— that’s $6,200 for every $100,000 spent.
Startup companies can now benefit from their research activities to boost their bottom line, regardless of whether or not they’re profitable!
CREDIT BACKGROUND
NEW BUSINESSES OR START-UP COMPANIES MAY BE ELIGIBLE TO APPLY THE R&D TAX CREDIT AGAINST THEIR EMPLOYER PAYROLL TAX.
Effective as of December 31, 2015, the Protecting Americans from Tax Hikes Act of 2015 (PATH Act) provided that eligible small businesses (Startups) may elect to use the federal R&D Tax Credit to offset the employer’s portion of the social security (OASDI) payroll tax liability. Startup companies can now benefit from their research activities to boost their bottom-line, regardless of whether or not they’re profitable. Under the new law, an eligible company is now able to utilize up to $250,000 in federal R&D Tax Credits to offset payroll taxes each year.
​
The new payroll tax credit is available only to companies that:
-
The taxpayer did not recognize any gross receipts for any taxable year preceding the 5 taxable year period prior to the current taxable year period.
-
Less than $5 million of gross receipts in the current tax year.
-
The taxpayer properly elects to use the federal R&D credits against its employer payroll taxes.
-
Qualifying research activities and expenditures.
o The maximum benefit an eligible company is allowed to claim against payroll taxes each year under the new law is $250,000.
FREQUENTLY ASKED QUESTIONS
WHEN DOES THIS NEW PAYROLL TAX CREDIT TAKE EFFECT?
The payroll tax credit will be available for qualified expenses incurred in 2016. The credit must be calculated and shown on a taxpayer’s current taxable year’s federal income tax return, and the portion of the R&D credit that will be applied to reduce payroll taxes will need to be identified and elected when that return is timely filed.
HOW QUICKLY DOES A COMPANY NEED TO MOVE ON THIS? WHEN DOES IT NEED TO GET STARTED?
Because the opportunity to reduce payroll taxes is based on 2016 expenses, companies should act quickly to determine their eligibility under the new rules and start planning so they know what types of information will need to be gathered at the end of the year. Again, this credit must be specified, elected, and filed on the original current year tax return before you can begin to reduce payroll taxes in the following tax year.
WHAT COMPANIES QUALIFY?
The new payroll tax credit is available only to companies that have no more than $5 million in gross receipts for the current taxable year period and did not recognize any gross receipts in the preceding 5 taxable year period prior to the current taxable year period. The company must also have qualifying activities and research expenditures to be eligible.
WHO QUALIFIES AS HAVING GROSS RECEIPTS FOR FIVE YEARS OF LESS?
The new payroll tax credit is only available to companies that have not recognized gross receipts for the preceding five taxable year periods prior to the current taxable year period. However, a company that was in existence prior to the five preceding taxable periods, but didn’t receive gross receipts, could still qualify. Although the law is intended to benefit small businesses, larger businesses could potentially benefit under the rules as they’re currently written.
HOW IS $5 MILLION IN GROSS RECEIPTS DEFINED?
A company must have less than $5 million in annual gross receipts in the current taxable year period to be eligible. For businesses that are just starting in the current tax year, their gross receipts must fall under the $5 million limit after being annualized for a full 12 months. Gross receipts are generally characterized as those reported on Line 1c of the company’s federal income tax.