Getting the Most From R&D Through New Payroll Tax Credit


 

Research

 

The research and development department is important for a business because it helps create or improve products and processes.

A new payroll tax credit allows some small businesses to claim up to $250,000 in expenses for increasing research activities as a tax credit against the employer’s share of Federal Insurance Contributions Act taxes for tax years starting Jan. 1, 2016 and later.

The first quarter of 2017 is the first that qualified small businesses may apply the tax credit. The 2017 Form 941, Employer's Quarterly Federal Tax Return, was revised to include a line for qualified small businesses to receive the credit that would apply against employer-paid taxes under the Federal Insurance Contributions Act.

The portion of the credit used against the employer’s share of Social Security taxes is allowed in the first quarter starting after the date that the qualified small business filed its income tax return, the Internal Revenue Service said in guidance on the tax credit. 

Form 6765, Credit for Increasing Research Activities, and Form 8974, Qualified Small Business Payroll Tax Credit for Increasing Research Activities, are to be used by qualified small businesses to report and claim the credit. Form 8974, expected to be released soon, is available now only as a draft that should not be filed. Form 8974 serves as the bridge from Form 6765 to Form 941.

Form 6765 is used to claim a certain amount of the credit as a payroll tax credit against the employer portion of Social Security taxes. The amount from Line 44 of Form 6765 is entered on Line 5 of Form 8974. Social Security tax amounts in Column 2 of Lines 5a and 5b of Form 941 are to be entered on Lines 8 and 9 of Form 8974. The credit amount on Line 12 of Form 8974 is to be entered on Line 11 of Form 941.

The credit for increasing research activities is a permanent tax credit designed to encourage businesses to increase the amounts they spend on research and experimental activities, including energy research, the IRS said. The research is to be undertaken for discovering technological information that is used to develop a new or improved product, process, computer software or invention, the IRS said. 

Qualified research expenses are the total of in-house and contract research expenses paid by the business during the taxable year. Contract research expenses are 65 percent of any amount paid to anyone other than an employee for qualified research, the IRS said.

A qualified small business is a company or partnership that had gross receipts for the taxable year of less than $5 million, the IRS said. Additionally, the business should not have gross receipts for any year preceding the five-year period ending with the taxable year, the IRS said.

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