An Example of How the New Payroll Tax Offset Works

bookkeeping-615384_640The ‘elixir of economic growth’, whilst sounding like a surreptitious tincture crafted by an alchemist, is actually frequently assumed by economists to be relating to research and development (R&D). Thanks to the PATH Act being passed in December, the United States observed the Federal R&D Tax Credit finally convert to permanent. Now, start-ups and small companies may be eligible for generous tax savings allowing them to also reap the benefits of R&D.

In our last post we clarified the particulars of the new Payroll Tax Offset legislation and how that impacts an R&D claim. But just how much of an influence will this legislation have on a single company?

Start-ups, in particular, will likely benefit the most as the changes have made the credit more accessible to smaller ventures. Essentially, the new ruling allows for fledgling companies to claim the credit against their payroll taxes, presuming that the employees are engaged in research and development.

An example of how the new Payroll Tax Offset has been provided below to clarify how this impacts a start-up company.

A start-up hires three people whose activities are 100% dedicated on qualifying R&D. Each one makes $60,000 a year. In this example, the start-up would save a total of $11,160 per year – 6.2% of their collective salaries. However, the R&D tax credit would only offset half that amount if they only spent half their time on R&D.

Moreover, what is suitable as “qualified R&D activities” doesn’t need to pertain to rocket science. Your start-up may be eligible if it is working to develop new and improved products; is facing technical uncertainty; the work is technological in nature; and it involves a process of experimentation. Fundamentally, the changes in the R&D tax credit could now allow young companies to save thousands of dollars.

If you want to get the Payroll Tax Offset, and avoid IRS inspection, you may wish to contact a qualified R&D tax specialist, such as Swanson Reed. In addition, you will need to properly document your R&D projects as soon as they start. Read our blog on ‘How to make the most of your R&D Tax Credit Claim’ to discover more about the documentation needed.

Contact Swanson Reed for more information on how we can advance your company’s market value and boost its bottom line through the Research and Development Tax Credit.

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