The PATH Act changed the federal research tax credit in many ways. In addition to making the R&D tax credit permanent, it also provided for small businesses to now use the research tax credit to offset alternative minimum tax or in some instances, offset payroll taxes.
In our blog post
Action Required: Making the Payroll Tax Election, we discussed the recent changes in the Payroll Tax Credit under IRS Notice 2017-23 on how to make the election if you are filing an amended tax retu
Today we will cover the Payroll Tax Credit and how it is elected, allocated and taken when there is a controlled group of companies (with greater than 50% common ownership).
In the case of a controlled group (as defined under IRC Regulations 1.41-6(a)(3)(ii)), each member makes a separate payroll tax credit election. The amount each member is allowed is limited to the least of:
1) The electing member’s allocable share of the group’s research tax credit,
2) The electing member’s allocable share of the $250,000 amount, or
3) The amount of the electing member’s business credit carryforward under IRC Section 39 carried from the taxable year (for an electing member other than a partnership or S corporation).
In the event the research credit for the controlled group exceeds $250,000, each member would be limited to a pro-rata amount they could elect to take as a payroll tax credit based upon their allocated research credits. Any excess amount allocated to them (that was not available as a payroll tax credit) would still be available as a research tax credit.
It is important to remember that the controlled group must still meet the gross revenue test for a qualified small business of less than $5 million AND did not have any gross receipts for any taxable year preceding the 5-taxable-year period ending with such taxable year).
While the $5 million gross receipts test is taken at the controlled group level, the election to use the allocated research tax credits against payroll tax is done at the individual company level.
The research and development tax credit is one of the most lucrative and beneficial tax credits available to US companies. With the credit now permanent, able to offset AMT and payroll taxes for certain companies, the value continues to grow and make US companies more competitive globally.
Need help documenting and calculating your R&D tax credit? Let Acena Consulting help you maximize the value to you.