Claiming R&D Payroll Credits in Conjunction with FFCRA and CARES Act Payroll Tax Relief Incentives
Startups that are eligible to claim the R&D credit for payroll tax offset can increase the cash benefit by also taking advantage of recent COVID-19 aid packages. The Families First Coronavirus Response Act (H.R. 6201 or FFCRA) and Coronavirus Aid, Relief, and Economic Security (CARES) Act deliver federal assistance to employers by providing credits and incentives against their payroll taxes. Taxpayers can claim both the R&D payroll tax credit and the refundable credits provided by the two acts to increase cash savings.
FFCRA became law on March 18, 2020. Among other benefits, FFCRA provides two types of payroll tax credits to employers who pay employees for emergency COVID-19 related self-care or care of others. The first FFCRA payroll credit is the emergency sick leave payroll tax credit and the second is the emergency family medical leave payroll tax credit. Both credits are refundable to taxpayers.
The CARES Act provides employers a refundable employee retention credit for certain wages paid to employees between March 13 and December 31, 2020. For employers with greater than 100 employees, the tax credit is 50% of qualified wages up to $10,000 paid to employees who are not performing services (maximum credit of $5,000 per employee). For employers with 100 or fewer employees, the tax credit is 50% of wages up to $10,000 paid to any and all employees (maximum credit of $5,000 per employee).
The CARES Act also allows employers to defer the employer portion of Social Security (6.2%) payroll taxes beginning March 27, 2020, ending December 31, 2020. Taxpayers must pay 50% of the deferred taxes by December 31, 2021, with the remainder due by December 31, 2022.
More details on the payroll tax relief opportunities and requirements within the COVID-19 aid packages can be found here.
R&D Credit Interplay
Companies can increase immediate cash savings if they can offset FICA with R&D payroll credits first and have the excess of other credits refunded. For example, if an employer generates $100,000 of 2019 R&D payroll credits, qualifies for $250,000 of employee retention credits, and has $100,000 of employer related FICA to pay on its Q2 quarterly Form 941 filing, the R&D credits can be used to offset the FICA due, and $250,000 of the employee retention credits will be refunded as cash back to the taxpayer. Unlike R&D payroll offset credits, which would carry forward to future quarters, employee retention and FFCRA credits in excess of FICA due result in a cash refund to taxpayers.
For companies that opt to defer payroll taxes, R&D payroll credits and other payroll offset incentives are still timely and value-add as amounts in excess of credits can be deferred, limiting payments due later.
Companies that take advantage of SBA loans and are not eligible for certain COVID-19 payroll tax relief can still use R&D credits to offset FICA if they meet certain criteria, including:
- Gross receipts less than $5 million in the tax credit year; and
- No gross receipts for any taxable year preceding the 5-taxable-year period ending with the tax credit year.
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