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Inflation Reduction Act’s Impact on the Research and Development Tax Credit

Inflation Reduction Act’s Impact on the Research and Development Tax Credit

by Betsi Barrett

By August 31, 2022October 25th, 2023Insights

In short: The Inflation Reduction Act increases the scope of the R&D Tax credit.

With the rise in the annual inflation rate, President Biden signed the Inflation Reduction Act of 2022 into law on August 16, 2022. This legislation provides an array of methods to combat inflation, including the expansion of the Research and Development (“R&D”) Tax Credit.

Enacted in 1981 to incentivize innovation, the R&D Tax Credit, offers a dollar‐for‐dollar offset of federal income tax liability. Qualified small businesses (“QSB”) may also use the credit to offset federal payroll withholding tax obligations. This can be extremely beneficial as it allows for an immediate cash benefit when cash flow is tight.  In order to utilize the federal R&D credit against payroll withholding taxes, a QSB must have less than $5 million in gross receipts in the current tax year and can have no more than five years of gross receipts.  Prior to the enactment of the new legislation, taxpayers could only offset a maximum of $250,000 of the federal R&D tax credit against payroll taxes in any given year.

Section 13902 of the Inflation Reduction Act allows a QSB to apply an additional $250,000 to offset payroll taxes, thereby allowing for a maximum of $500,000 to be applied against payroll. The credit cannot exceed the tax imposed for any calendar quarter, with unused amounts of the credit carried forward. This amendment takes effect beginning after December 31, 2022.

What to Look For & Action Items

If your company is engaged in development or improvement of a product, software application, manufacturing process or technology, you may qualify for the R&D tax credit and significant cost savings

Companies across various industries can claim the credit, including but not limited to the following:

  • Architecture and Engineering
  • Aerospace
  • Construction
  • Food and Beverage
  • Manufacturing
  • Pharmaceuticals
  • Software Development

Contact Us

For more information about the R&D tax credit or for a free consultation, please contact Betsi Barrett or Nina Desai by emailing Bennett-Thrasher@btcpa.net.