New Option for Claiming Research Credit

The IRS recently provided interim guidance to qualified small businesses on a new option for claiming the research credit. Eligible businesses are now able to offset payroll taxes by applying the research credit against their payroll tax liability, something that could only be applied toward income tax liability prior to 2016.

As part of the 2015 Protecting Americans From Tax Hikes (PATH) Act, qualified businesses filing (or have filed) their 2016 federal income tax returns are able to select this new option for the first time. To be eligible, businesses must have less than $5 million in gross receipts and could not have gross receipts prior to 2012. This new option is especially beneficial to startup companies showing little to no income tax liability.

Should a business be eligible and meet the criteria for qualifying research expenses, it can offset up to $250,000 of the credit toward its payroll tax liability. If a business has already filed its 2016 returns, there is still the option to make this election. Under a special rule for tax year 2016, the IRS is allowing businesses that failed to choose this option but would like to, file an amended return by December 31, 2017.

A business will need the following forms to claim this credit:

• Form 6765, Credit for Increasing Research Activities – attach this form to a timely-filed business income tax return.
• Form 8974, Qualified Small Business Payroll Tax Credit for Increasing Research Activities – attach this form to the business’ payroll tax return, for example Form 941, Employer’s Quarterly Federal Tax Return.

For more information, please see Notice 2017-23 for further details.

If your business is interested in claiming the research credit and/or applying it to its payroll tax liability, please contact your advisor for guidance at (805) 963-7811.