How the R&D Credit Can Help New Companies Offset Payroll Taxes
According to the Protecting Americans from Tax Hikes (PATH) Act of 2015, new businesses or start-up companies that are eligible to receive research & development (R&D) credit can elect to offset employer portion of social security payroll tax liability. The maximum benefit an eligible company can claim against payroll taxes is $250,000 for up to five years. This payroll offset allows companies to receive a benefit for research activities even if they aren't profitable.
Does my company qualify for the offset?
To be eligible for this offset, companies must meet all of the following qualifications:
- Average annual gross receipts for 3 year period prior to year credit taken must not exceed $50 million
- No gross receipts for more than 5 years
- Less than $5 million in gross receipts in the year credit is elected
- Have qualifying research activities & expenses
- Have payroll-tax liability
What are "qualified research activities & expenses"?
- Expenses for discovering technological information to develop new or improved business component
- Activities must be elements of an experimental process relating to new function, performance, reliability, or quality
- Activities must be applied separately to each business component
How to make this election?
- Report eligible costs (wages, supplies, rental/lease of computer, & contract research expenses) on Form 6765 to calculate credit
- Complete section D "qualified small business payroll tax election & payroll tax credit"
- Begin claiming payroll tax credit on first quarterly filed payroll tax return, which is filed after the filing of the income tax return reflecting this election of up to $250,000