R&D Tax Credits - Against payroll Taxes

Specialty Tax Services

Qualified Small Businesses Can Utilize R&D Credit

Small business taxpayers can apply up to $250,000 in Research and Development tax credits against their payroll tax liabilities for tax years starting on or after January 1, 2016. Previously, businesses could not utilize the benefits of the R&D Tax Credit until those companies realized taxable income.

Companies conducting research and development activities during start-up and early-growth stages can now potentially realize a return on their sunk costs right away.

To be eligible, the taxpayer, must be a qualified small business that:

  1. has gross receipts of less than $5 million for the taxable year, and
  2. did not have gross receipts for any taxable year before the 5-taxable-year period ending with the
    taxable year.

Note that any receipt of income by the start-up small business starts the clock running on the 5-taxable-year period mentioned above. In addition, all gross sales, receipts for services, interest, dividends, rents, royalties, proceeds from the sale of property and annuities are included in the definition of gross receipts.  As an example, let’s look at Acme Corporation that has the following gross receipts:

Tax YearGross Receipts
2018$1M
2017$7M
2016$4M
2015$3M
2014$4M
2015-$0

Acme had no gross receipts in 2013 or any prior taxable year.  It is a qualified small business for taxable year 2018 because it had less than $5M for taxable year 2018 and did not have gross receipts before taxable year 2013 (prior to the five-year-period).  It is important to note that the amount of gross receipts during the five-year-period are irrelevant in determining whether Acme is a qualified small business.  In 2019, Acme will not be a qualified small business because it had gross receipts in 2014.

Limitations: The credit can be limited with aggregated gross receipts of other companies that are under common ownership as they are treated as a single taxpayer in determining gross receipts for these purposes. The payroll tax credit may not exceed $250,000 nor the employer portion of the social security tax.  In addition, one can not apply research credits to payroll tax liabilities for more than 5 taxable years.  Any payroll tax credit that exceeds these limitations are carried over to the succeeding periods and allowed as a payroll tax credit for the succeeding periods.

If you are a small business that can take advantage of these tax savings opportunities, speak to us today!