Congress got something accomplished! In December of 2015, Congress passed the Protecting Americans from Tax Hikes (PATH) Act. Among other things, this Act makes a few important changes to the tax credit for research and development expenses that could have a significant impact on how you operate and plan for your startup.
The Research and Development Credit was first introduced in 1981. Since then the credit has been subject to many changes and was never permanently made into law. The PATH Act remedies that, and the 20 percent credit for increasing research expenditures is now permanent, making it possible for businesses to more effectively and reliably do their tax planning.
Beginning with its 2016 tax return, startups that claim the research and development credit may be able use that credit to offset its FICA payroll taxes for up to $250,000 each year as early as the second quarter of 2017, and more good news, the credit can be carried forward indefinitely. This change is significant and will provide a much needed influx of cash for startups that do not have a tax liability to offset with the previous R&D credit.
You are eligible to use the research and development credit against your payroll taxes if your business is a qualified small business.
1. This means the business has not had gross receipts for longer than the most recent five years (to make the election in 2016, you cannot have had gross receipts prior to 2012);
2. And gross receipts do not exceed $5 million in any year in which the credit is elected.
3. Must have qualifying research activities and expenditures.
How to Make the Election?
1. Complete Section D on Form 6765, Credit for Increasing Research Activities, by specifying how much of the credit will be used to offset the business’s FICA taxes on a timely-filed (including extensions) tax return.
2. The election can be made five times, and the credit cannot exceed $250,000 in any single year.
How to Claim the Credit?
1. You claim the credit on the payroll tax return beginning in the quarter after the election is made, and the tax return is filed.
2. File Form 8974, Qualified Small Business Payroll Tax Credit for Increasing Research Activities, with your quarterly payroll tax return, Form 941, to show the calculation of available credit to report on Form 941.
For businesses who qualify and have expenses eligible for the research credit, electing and claiming the potential $250,000 credit is relatively simple. The PATH Act’s change to the research and development credit puts cash back in the pockets of businesses when they need it the most and can reinvest that money in their company to further innovation and growth and then thrive.
The rules regarding calculating the research and development credit can be complex. Please consult your tax advisor.