Research and Development Tax Credit Symposium: Navigating the Changes

By March 2, 2018R&D Tax Credits
Navigating the New Payroll Tax Offset and Small Business Tax Credit for the Research and Development Tax Credit
In December of 2015, the PATH Act was passed which allowed for a broader application of the R&D Tax Credit. More specifically, this change in the credit promises more benefits for small businesses and startup companies.

Qualified small businesses are now eligible for payroll offsets regardless of profitability. The payroll offset applies to companies with five years of fewer of gross receipts preceding the claim year. Gross receipts is broadly defined under §448(c)(3), NOT IRC §41(c)(7) and Reg §1.41-3(c). This means that special attention must be paid to anything that may have been reported as income in the businesses history. One other thing that has been a common misconception is that the law states that there must be $5 million in gross receipts in the CLAIM year to qualify for the offset. The benefit is claimed on quarterly payroll returns (Form 941) in the first quarter following filing of the federal income tax return and any unused credits can carry forward to subsequent quarters. The credits application can be manipulted to best suit each company’s facts and circumstances. This means the benefit can be applied against payroll and income tax if the company has a small amount of tax liability as well. IRS Notice 2017-23 clarified that the credit for non-certified PEOs would also remain with the client not the PEO since the client controls the employees undertaking the activity. The deadlines for the payroll offset’s application to FICA liability are slightly different than the typical filing deadlines so its important to assess each client’s unique situation so that they will be able to benefit as soon as possible.

Thanks to these new benefits, the Research and Development Tax Credit can be utilized for small businesses and startups and Indago is here to help you simplify the process.

Stay tuned for our next post: “Best Practices for the Research and Development Tax Credit Studies”