Alan Osmolowski is a tax partner with BlumShapiro in Worcester, where he leads the firm’s technology and life sciences practice. He can be reached at aosmolowski@blumshapiro.com.
Updated: August 3, 2020
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Offsetting payroll taxes with R&D credits
By Alan Osmolowski
While tax reform at the end of 2017, often referred to as the Tax Cuts and Jobs Act, introduced many new changes for businesses, the research-and-development tax credit provides a way to reduce tax liabilities, often saving companies hundreds of thousands.
However, many companies aren’t fully benefiting from the R&D credit because of common misconceptions about its applicability to their operations. It has been my experience oftentimes early stage technology and life science companies without an income tax liability don’t think they can get an immediate cash benefit from R&D tax credits. This is not the case.
The Protecting Americans from Tax Hikes Act of 2015 created an opportunity for qualified small businesses to offset their contribution to payroll tax using federal R&D tax credits for up to five years.
Key points:
Businesses may use their R&D tax credits to offset payroll tax, providing they meet the following requirements:
• Gross receipts for five years or less
• Less than $5 million in gross receipts in the year the R&D credit is claimed
• Qualifying research activities and expenditures
• Stock is not publicly traded
What is the maximum benefit?
R&D tax credits are applied against quarterly payroll tax payments for up to five years. In any given year, a company can apply up to $250,000 against its contribution to the Social Security tax of 6.2% of each employee’s salary.
For example, a startup software company claimed a $65,000 R&D tax credit on its 2019 federal return. This entire amount could be used to offset its payroll taxes in 2020. In another example, an early-stage biotech company claimed a $270,000 R&D tax credit in 2019. In this case, only $250,000 can be applied to payroll taxes in the current year; the remaining $20,000 would be used to offset ordinary income tax or could be carried forward to next year.
How does it work?
The payroll tax offset is available on a quarterly basis beginning in the first calendar quarter after a taxpayer files its federal income tax return. First, a taxpayer should complete Form 6765 – Credit for Increasing Research Activities, and elect the payroll tax credit. The taxpayer then claims the payroll tax credit by completing Form 8974 – Qualified Small Business Payroll Tax Credit for Increasing Research Activities. This form must be attached to the quarterly payroll tax return, Form 941 – Employer’s Quarterly Federal Tax Return. Any unused credits can be carried forward.
Can the payroll tax offset be elected on an amended return?
If a taxpayer had not previously elected the payroll tax credit but then submits an amended tax return, the taxpayer can claim the credit after the date the amended return was filed, but cannot claim the payroll tax credit elected on the amended return in an earlier quarter.
Here in the Worcester area, we’re lucky to have a growing technology and life sciences industry. These firms – especially those in the early stages – can continue on this trajectory by making the most of R&D tax credits. With more of these companies adding to the Worcester economy, we all benefit.
WBJ Web Partners
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