New Guidance for R&D Tax Credit Payroll Offset Creates Opportunity for Small Businesses
Under the PATH Act of 2015, eligible small businesses may elect to utilize up to $250,000 of the Research Tax Credits (R&D tax credit) they generate under Internal Revenue Code section 41 and after 2015 against their portion of payroll—i.e., Federal Insurance Contributions Act (FICA)—taxes. On March 28, 2017, the IRS released Notice 2017-23 to clarify small business eligibility and how the offset is applied. It also enables taxpayers who didn’t make the election on their 2016 tax returns to amend it and claim the benefit.
In order to qualify as an “eligible small business,” a taxpayer must have: (1) gross receipts of less than $5 million in the year in which it seeks to make the election and (2) no gross receipts for any tax year before the five years ending with the election year, e.g., before 2012 if the election year were 2016. The notice clarifies that “gross receipts” here include total sales, net of returns and allowances, all amounts received for services, and any income from investments and other incidental or outside sources. This inclusive definition means that taxpayers with even small amounts of investment income or interest prior to 2012 may not elect the payroll offset. This is significant because it limits taxpayer eligibility, specifically for companies that had been in existence prior to 2012.
Taxpayers can benefit from the payroll offset in the first calendar quarter after filing their tax returns. The Notice explains that if the R&D Tax Credit exceeds the payroll tax due on a quarterly filing, the excess may be carried over to succeeding calendar quarters until the credit is used or the $250,000 limit is reached. In addition, the Notice enables taxpayers who failed to elect the payroll offset on their original returns for 2016 to take advantage of the provision by filing an amended return on or before December 31, 2017. The Notice provides specific filing instructions as it relates to amending returns to retroactively make this election.
Finally, the Notice provides guidance for members of a controlled group or groups regarding aggregation and allocation of the benefit and requests public comment on other payroll tax credit issues to be addressed in future guidance.
With the new interim guidance, taxpayers now have more certainty in electing R&D Tax Credits to offset their payroll tax starting in 2016. Allowing small businesses and startups to benefit from the R&D Tax Credit regardless of whether they pay income taxes frees up private capital and enables investment in resources to facilitate new or improved technologies.
For more information about the R&D Tax Credit, please contact us today.
Material discussed in this communication is meant to provide general information and should not be acted on without obtaining professional advice tailored to you or your company’s individual and specific needs. Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used by any person or entity, for the purpose of (i) avoiding penalties that may be imposed on any taxpayer or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. This information is for general guidance only and is not a substitute for professional advice.
The information contained herein should not be construed as personalized investment advice. Investment in securities involves the risk of loss, and past performance is no guarantee of future results. There is no guarantee that the views and opinions expressed in this document will come to pass. Historical performance results for investment indexes and/or categories generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment-management fee, the incurrence of which would have the effect of decreasing historical performance results. There can be no assurances that your portfolio will match or outperform any particular benchmark.
Information presented was obtained from sources deemed qualified and reliable; however, MFA makes no representations as to accuracy, completeness, suitability, or validity of any information within this communication and will not be liable for any errors, omissions, or delays in this information or any losses, injuries, or damages arising from its display or use. Any forward-looking statements are believed to be reasonable; however, MFA gives no assurance that such expectations will prove to be correct.