Small Businesses Can Now Apply Research Credit to Payroll Tax Liability

The Internal Revenue Service (IRS) is offering a new method for start-up businesses to claim the research tax credit. Small businesses with gross receipts under $5 million are now able to apply part or all of their research credit against their payroll tax liability, rather than their income tax liability. The business cannot have any gross receipts pre-2012.

Prior to 2016, this was not an option, but the Protecting Americans from Tax Hikes (PATH) Act legislation, passed in December 2015, has allowed the change. The payroll tax credit is a good choice for businesses with a small or non-existent income tax liability as up to $250,000 of research credit can be applied against their payroll tax liability.

How To Apply

The IRS recently released Notice 2017-23, which provides interim guidance regarding how eligible businesses can choose this option. To apply, the business must complete and attach Form 6765, Credit for Increasing Research to their income tax return. However, if a business has already filed this tax season, they can still take advantage of the new option. Due to a special rule for the 2016 tax year, businesses that did not originally choose the option can still do so by completing an amended return by December 31, 2017.

Once the option has been selected, businesses can claim the payroll tax credit by filling out Form 8974, Qualified Small Business Payroll Tax Credit for Increasing Research Activities and attaching it to their payroll tax return.

If you would like to discuss the research tax credit further, please do not hesitate to contact one of Swanson Reed’s offices today.

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