The PATH Act changed the research tax credit for taxpayers in valuable and important ways. In addition to making this tax incentive permanent, the PATH Act also added two game changing provisions for small businesses.
First, the PATH Act provides for the research tax credit to be used to offset Alternative Minimum Tax (AMT) for businesses with average revenues of less than $50 million. This change means small business owners who pay alternative minimum tax can now utilize the R&D tax credit to lower their taxes.
The second change to the R&D tax credit is the addition of an election to use the research tax credit as a payroll tax credit for companies with revenues of less than $5 million.
Today, we will review the basics of this provision and the critical deadline for making this election.
Beginning in 2016, qualified small businesses (companies with revenues under $5m in the tax year AND who did not have any gross receipts for any taxable year preceding the 5-taxable-year period ending with such taxable year) may elect to use up to $250,000 of their federal research tax credit as a payroll tax credit against the employer portion of their payroll taxes.
The election to use research tax credits against payroll taxes is made on Form 6765. The payroll tax credits may then be used beginning in the first quarter following the filing of the corporation’s federal tax return. In the event the payroll tax credits exceed the quarterly payroll taxes, the remaining payroll tax credits are carried forward to the next quarter.
All members of a controlled group (as defined in IRS Regulation Section 1.41-6(a)(3)(ii)) are treated as a single taxpayer and must aggregate gross receipts for purposes of determining whether they are a qualified small business.
Missing the Election:
As noted above, a taxpayer that generates research tax credits in 2016 may elect to use all or a portion of their research tax credits against their payroll taxes.
What if a company filed their tax return without taking the research tax credit?
Guidance under IRS Notice 2017-23 allows a taxpayer to elect to treat a portion of their research tax credits as a payroll tax credit on an amended tax return if they file the amended tax return on or before December 31, 2017. In addition, the taxpayer must either: 1) indicate on the top of its Form 6765 reflecting the payroll tax election that the form is “FILED PURSANT TO NOTICE 2017-23,” or 2) attach a statement to its Form 6765 reflecting the payroll tax credit election that the form is filed pursuant to Notice 2017-23.
Taking the payroll tax credit
A qualified small business claiming the payroll tax credit on its employment tax return must complete Form 8974, Qualified Small Business Payroll Tax Credit for Increasing Research Activities. If the taxpayer files quarterly payroll tax returns, the payroll tax credit would be available in the first quarter following the filing of the taxpayer’s income tax return. If the taxpayer files annual payroll tax returns, the payroll tax credit would be taken on the annual payroll tax return that includes the first quarter after the filing of the taxpayer’s income tax return.
Taxpayers can still take advantage of the 2016 payroll tax credit even if they have not elected it on their originally filed tax return. However, the amended return must be filed by December 31, 2017 and include the disclosures noted above.
Need help documenting your R&D tax credit and making the payroll tax credit election? Give us a call at Acena Consulting. We can help you understand the research tax credit, document your research activities and calculate your federal and state credit.