Small Entities Payroll Tax Offset
While any company can use the R&D tax credit against federal income tax, for small businesses and startups, who may be in a loss position in their earlier years, they may have to wait several years before they are able to monetize their credit carryforward against federal income tax liability.
The PATH Act of 2015 set forth provisions to allow certain eligible small businesses and startups to utilize their Federal R&D tax credit against the employer’s portion of quarterly payroll tax subject to FICA. This allows for more immediate monetization of the credit than ever before.
In order for a company to be eligible to use their R&D tax credit against payroll tax, the following two criteria BOTH must be met:
- Entity must have less than $5 million in gross receipts for the credit year in which the credit is being claimed;
- Entity can not have had ANY gross receipts prior to the 5-year period ending with (and inclusive of) the tax year in which the credit is being claimed.
Eligibility Requirement for 2018
- No gross receipts in 2012 (and prior)
- No requirement for years 2013 through 2017
- Less than $5M in gross receipts for 2018
Process for Claiming the Payroll Tax Offset
- Qualified small businesses
- 4-Part Test
R&D Tax Credit Study
- R&D credit calculation prepared
- Supporting documentation gathered
- Form 6765 (filed with annual tax return)
- Form 941 – Quarterly payroll tax filing
- Form 8974 – Attached to Form 941
When Does the Offset to Payroll Tax Occur?
- The R&D tax credit claimed on the annual tax return offsets the payroll tax liability in the quarter following the quarter in which the annual tax return is filed.
- The credit serves to reduce the payroll tax liability in that quarter, which would have otherwise been due.
- Any credit amount in excess of quarterly payroll tax liability is carried forward to subsequent quarter(s).