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When President Biden signed the Inflation Reduction Act (IRA) into law in August, most of the headlines covered the law\u2019s climate change and health care provisions. But the law also enhances an often overlooked federal tax break for qualifying small businesses.<\/p>\n
The IRA more than doubles the amount a qualified business can potentially claim as a research and development (R&D) tax credit to offset its payroll tax for tax years starting after 2022 \u2014 to a maximum of $2.5\u00a0million over five years. The credit allows a qualified business to leverage the substantial R&D tax benefit even if it has little to no income tax liability, potentially freeing up significant cash\u00a0flow.<\/p>\n
Background on the pre-IRA credit<\/strong><\/p>\n The Protecting Americans from Tax Hikes (PATH) Act created a permanent incentive for eligible start-up companies to pursue R&D activities within the United States. The Section\u00a041 tax credit for qualifying in-house and contract research activities already existed, but early-stage companies that hadn\u2019t yet incurred income tax liability couldn\u2019t take advantage\u00a0of\u00a0it.<\/p>\n The PATH Act revised the Sec.\u00a041 credit to allow taxpayers to elect to apply up to $250,000 of the credit against their share of the Social Security, or FICA, tax for their employees, rather than against income tax. The revision became effective for tax years that began after Dec.\u00a031,\u00a02015.<\/p>\n The payroll tax election is available to taxpayers with 1)\u00a0gross receipts of less than $5\u00a0million for the tax year, and 2)\u00a0no gross receipts for any tax year more than five years prior to the end of the current tax year. The latter requirement essentially limits the payroll tax credit to start-up companies. If the taxpayer had a tax year of less than 12\u00a0months, the gross receipts must be annualized for a full\u00a0year.<\/p>\n Be aware that not all research is eligible. To qualify for the credit, the research must\u00a0be:<\/p>\n Qualifying research expenses include wages for employees involved with the research, supplies to conduct it and amounts paid for the use of computers. They also include 65% of the amounts paid or incurred for contractors.<\/p>\n The credit equals the smallest amount of 1)\u00a0the current year Sec.\u00a041 credit, 2)\u00a0an elected amount not exceeding $250,000, or 3)\u00a0the general business credit carryforward for the tax year (before application of the payroll tax credit for the year). Note that the general business credit carryforward limit doesn\u2019t apply to S\u00a0corporations or partnerships.<\/p>\n The IRA expansion<\/strong><\/p>\n Under the PATH Act, a qualified small business could elect to apply its R&D credit against only the 6.2% Social Security tax. Beginning with the 2023 tax year, eligible businesses will be allowed to apply an additional $250,000 against their 1.45% Medicare tax liability.<\/p>\n While the total maximum credit is now $500,000, that amount is bifurcated. You can apply no more than $250,000 against each prong of payroll tax liability \u2014 FICA and Medicare, respectively.<\/p>\n As under the PATH Act, you can claim the credit for no more than five years. Existing aggregation rules, which treat related entities as a single taxpayer for purposes of determining gross receipts, also continue to apply. Any credit is allocated among the entities, but each entity must make the election separately.<\/p>\n Claiming the credit<\/strong><\/p>\n You can make a payroll tax credit election by having us complete the appropriate portion of Form 6765, \u201cCredit for Increasing Research Activities,\u201d and submit it with your income tax return. To then claim the credit, complete Form\u00a08974, \u201cQualified Small Business Payroll Tax Credit for Increasing Research Activities\u201d and attach it to your employment tax\u00a0return.<\/p>\n You can apply the credit to offset payroll tax no earlier than the first quarter after<\/em> you file the return reporting the election. The credit can\u2019t exceed the amount of tax imposed for any calendar quarter. Unused amounts can be carried forward.<\/p>\n What if you were eligible for the R&D credit previously but didn\u2019t claim it because you were unaware of\u00a0it or for another reason? The IRS recently tightened the requirements to claim a refund of the R&D\u00a0credit.<\/p>\n To be considered sufficient, a refund claim must:<\/p>\n These so called \u201citems of information\u201d must be submitted when the refund claim is filed, along with a declaration signed under penalty of perjury verifying their accuracy. If your refund claim is deemed deficient, you\u2019ll receive a letter providing 45\u00a0days to cure the deficiency.<\/p>\n More to come<\/strong><\/p>\n The IRS is expected to issue guidance on the expanded small business R&D tax credit, as well as revised tax forms for 2023. Contact us if you think you may qualify, now or in the\u00a0past.<\/p>\n \u00a9 2022<\/em><\/p>\n <\/body> When President Biden signed the Inflation Reduction Act (IRA) into law in August, most of the headlines covered the law\u2019s climate change and health care provisions. But the law also enhances an often overlooked federal tax break for qualifying small businesses. The IRA more than doubles the amount a qualified business can potentially claim as […]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[7,59,10],"tags":[8,11,12],"class_list":["post-16369","post","type-post","status-publish","format-standard","hentry","category-articles","category-etra","category-news","tag-articles","tag-news","tag-updates"],"_links":{"self":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts\/16369","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/comments?post=16369"}],"version-history":[{"count":1,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts\/16369\/revisions"}],"predecessor-version":[{"id":16370,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts\/16369\/revisions\/16370"}],"wp:attachment":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/media?parent=16369"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/categories?post=16369"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/tags?post=16369"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}\n
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