How the R&D Credit Can Help New Companies Offset Payroll Taxes

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

https://www.irs.gov/irb/2017-16_IRB#NOT-2017-23

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The Cultural Alliance of Greater Washington has worked with Bormel, Grice & Huyett, P.A., since 1988. Their knowledge of the arts and the arts community make their services invaluable. They can translate accounting terminology into a comprehensive language. For many organizations, the accounting firm of Bormel, Grice & Huyett provides the financial "information bridge." We whole-heartedly recommend Bormel, Grice & Huyett, excellent accountants who care about our arts organizations.
Jennifer Cover Payne, Executive Director, Cultural Alliance of Greater Washington

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