As a new business owner or start-up executive, you may already recognize that the research and development tax credit can help you deduct qualifying operations and activities within your organization. However, you may not know that eligible companies can also apply the R&D tax credit against payroll taxes – even if you’re in startup mode and not paying taxes yet. Understanding the rules and requirements of the payroll tax can help maximize overall tax benefit and cash flow opportunities within your organization.
What You Should Know About the R&D Payroll Tax
As part of the Protecting Americans from Tax Hike (PATH) Act of 2015, the innovation tax credit was permanently extended, providing several key incentives to qualifying small business owners for taxable years beginning on (or after) January 1, 2016. The final program bill included a 2016 enhancement with offsets to both the AMT (alternative minimum tax) as well as payroll tax (for up to five years) for qualifying organizations. The new R&D tax credit payroll, as outlined in IRC sections 41(h) and 3111(f), stipulates that eligible companies with less than $5 million in gross receipts for the current taxable year and no gross receipts during any taxable year before the designated five-taxable-year period may leverage the R&D tax credit to offset the employer segment of the Social Security tax (also known as OASDI).
Some of the most commonly asked questions about the R&D payroll tax include:
What defines gross receipts?
When establishing eligibility for the research and development payroll tax credit, gross receipts must not exceed $5 million in the current tax year. Additionally, the taxpayer must also not have had any gross receipts prior to the designated five-year period. Gross receipts may include total net sales and revenues for services provided as well as income generated from investments, such as:
Additionally, gross receipts may also include profits earned from the sale of a property used in the business or trade.
Is aggregation required to satisfy the gross receipts requirements?
The innovation tax credit program mandates that all members within a controlled group or a faction of businesses and trades under a single control must be treated as an individual taxpayer. Due to this regulation, when assessing whether the obligations of the program are required, the collective gross receipts of all members of the control group must be considered for the taxable year.
How can I apply the tax limitation?
Small business owners have the option to elect the payroll tax credit when filing. The payroll tax credit limit is not to exceed $250,000 each year, for a maximum of five years of election total. A general estimate of the benefit may include:
- 10 employees/average salary: $70,000
- R&D credits identified: $50,000
- FICA refund: $44,000
- R&D credit carryover: $6,000
When can we begin leveraging the payroll tax credit?
According to the program outline, the payroll tax credit can be implemented on a quarterly basis beginning in the first quarter after the date when the business owner initially filed a tax return electing the credit. For example, if a 2019 tax return is filed by March 15, 2019, you can apply the payroll tax on your July 1, 2019 Form 941 filing.
Is the payroll credit limited to offsetting only the OASDI taxes that relate to research and development employees?
Under the PATH Act, the payroll tax credit is not restricted to only research and development employees. Instead, the credit can be used to offset the employer's OASDI tax portion for all designated employees within the organization.
Many small business and startup owners feel overwhelmed when using the research and development program to offset payroll taxes. Don't risk missing on out on capital you've earned with qualifying operations and activities. Contact Acena Consulting today for a no-risk discussion with our team of innovation tax credit experts.