Beginning in the 2016 tax year, start-ups or new businesses could potentially claim the Research and Development (“R&D”) tax credit against federal payroll withholding. This is extremely beneficial as new businesses often do not owe any income taxes and thus, were unable to utilize their federal R&D tax credits. Applying the credit this way allows companies to take advantage of the tax credit much sooner and possibly even in the current year. Specifically, a business can utilize the federal R&D tax credit as a payroll tax credit if they 1) have less than $5 million in gross receipts; and 2) have only had gross receipts for a maximum of 5 years. If they meet these criteria, they can offset the credit up to $250,000/year against the employer’s social security tax liability beginning with the first calendar quarter after the company files their tax return. As with any new legislation, there was uncertainty regarding timing of claiming the credit. Fortunately, the IRS issued a legal memorandum to help clarify taxpayers’ questions.
When can a Company begin claiming the payroll tax credit?
A Company can begin taking the credit against employer social security tax in the first calendar quarter that begins after the date on which the tax return is filed. Specifically, a Company takes the R&D credit against its liability for employer social security tax starting with the first payroll that includes wages subject to social security tax paid to its employees.
What happens if a Company cannot use the entire credit in the first payroll period?
If there is any excess credit remaining at the end of the quarter, the excess credit may be carried forward to the next quarter and treated as a payroll tax credit. The credit is taken and applied in each succeeding payroll quarter until it is used, provided there is payroll subject to social security tax.
Can a Company amend their tax return to claim the payroll tax credit?
Fortunately, if a Company failed to make the election on their timely filed, 2016 tax return, they can amend their return to claim the payroll tax credit; however, they must amend their return by December 31, 2017. Notably, the Company can then begin claiming the payroll tax credit in the quarter beginning after the date they filed their amended return.
While navigating the R&D tax credit can be quite complex, the Credits and Incentives team at Bennett Thrasher has in-house experts on the R&D Tax Credit. If you have any questions about whether you qualify for the R&D tax credit, please contact Betsi Barrett or Nina Desai by calling 770.396.2200.