If you’re a start-up company with annual gross receipts of less than $5 million, you can now apply up to $250,000 of your R&D credit against your payroll tax liability.
The federal R&D tax credit is a dollar-for-dollar reduction of federal income tax liability for qualified expenditures incident to the development or improvement of a product, process, software, formula or invention. It was recently made permanent by The Protecting Americans from Tax Hikes Act of 2015 (“PATH” Act).
Previously, a company had to actually generate a profit and taxable income to utilize the R&D tax credit. Now the PATH Act allows start-up companies to utilize the credit against their payroll taxes, if the companies perform “qualified research”.
What if your company is a start-up without taxable income and the resulting tax liabilities? The company may not be able to utilize the R&D tax credit in the current year, but can carry credits forward 20 years to utilize when it has taxable income. If your company would like to monetize this credit before then, starting in 2016, you can take advantage of the recently-enacted PATH Act’s new payroll tax offset.
Federal Payroll Tax Offset
The new payroll tax offset election allows qualified small businesses to elect to use a portion of their R&D tax credit now to offset payroll taxes instead of waiting to use the credit against future income tax liabilities. In tax years beginning after December 31, 2015, companies with less than $5 million in gross receipts and less than five years old have the option to apply up to $250,000 per year to offset payroll taxes.
For example, an early-stage company has approximately $1,500,000 in annual payroll expenses, of which $1,000,000 consists of wages paid for software development. If the company meets the definition of a qualified small business, it should qualify for approximately $50,000 in federal R&D tax credits. Assuming the company has no tax liabilities to offset, it can apply the R&D credits against its OASDI tax ($93,000), generating immediate cash recoveries.
| With R&D Tax Credit
(And Payroll Offset) |
Without R&D Tax Credit | |
| 2017 Total Payroll | $1,500,000 | |
| 2017 R&D Qualified Wages | $1,000,000 | |
| 2017 OASDI Tax | $93,000 | |
| 2017 R&D Credits | $50,000 | |
| Q2 Payroll Tax Liability | $4,875 | $28,125 |
| Q3 Payroll Tax Liability | $4,875 | $28,125 |
| Q4 Payroll Tax Liability | $24,625 | $28,125 |
| Total cash savings realized | $50,000 | $0 |
Timing
- To maximize benefit, 2016 federal income tax returns should be filed on or before March 15, 2017. Credits cannot be applied against payroll taxes until the quarter after the tax return is filed.
- A timely-filed return enables the taxpayer to maximize their payroll tax offset for 2017 as it can be used in the second quarter.
How?
- File 2016 federal tax return ASAP.
- Include Form 6765 claiming the R&D Tax Credit
- Designate the portion of your 2016 R&D Tax Credit to be applied against payroll tax. (Max $250,000 per year.)
- Second quarter 2017, the Company files its quarterly payroll tax return (Form 941)
- Attach Form 8974 to Form 941)
- Repeat this process for quarters three and four
Who Qualifies?
This credit remains one of the most challenging provisions of the tax code. TRCG Advisors’ qualified professionals can assist businesses with qualifying for and claiming the credit. Miles Consulting Group has partnered with Carolyn Driscoll and TRCG to maximize this opportunity for our clients as well. Unfortunately, note that as yet the benefit applies only against federal payroll taxes. So, we’ll need to wait to see if the states end up following suit. Contact us to take advantage of this opportunity.
About Carolyn & TRCG:
Carolyn has been providing research tax credit studies to companies claiming the credit since 2000. She spent over eleven years in the national R&D group of a Big 4 accounting firm and over four years leading the California practice at a large regional firm. Carolyn has significant experience assisting companies in identifying, increasing, documenting and supporting R&D tax credits for a variety of industries. Carolyn has worked with companies in a variety of industries including manufacturing, software development, wireless, high-tech, life sciences, med-device, pharmaceutical construction, food-processing and aerospace. She has extensive experience implementing client consulting projects and providing clients with federal and state taxing agency defense. Carolyn has also successfully defended companies during federal IRS and state examinations and appeals. Contact her at cdriscoll@trcgadvisors.com.
About Miles Consulting Group
Miles Consulting Group specializes in multi-state tax consulting for middle market businesses. Clients include technology, manufacturing, software and SaaS based companies doing businesses across state lines. We assist clients in determining the sales tax and income tax ramifications of creating a taxable presence in a state and how to address these issues with the various states. We also assist with state tax credits and incentives like the R&D tax credit.
