Are you a small business with less than $5 million in income and investments?
Do you want lower payroll taxes?
If you answered yes to any of the above, keep reading.
Our friends at BPM Accounting recently shared the Credit for Increasing Research Activities (also known as the R&D tax credit) with us and we think it’s an important piece of information for food startups to be aware of.
In December 2015, the Protecting Americans from Tax Hikes (PATH) Act made the Credit for Increasing Research Activities (R&D tax credit) permanent, while also introducing certain incentive enhancements. One of these enhancements included the ability for a Qualified Small Business (QSB) to claim the R&D tax credit as an offset to the employer portion of FICA payroll tax, up to $250,000 per year. Previously, taxpayers could only utilize the R&D tax credit against income tax liability.
ARE YOU A QUALIFIED SMALL BUSINESS?
The IRS defines a QSB as having:
- Gross Receipts of less than $5 million in the year credit is claimed
- Gross Receipts for five years or less
The definition of Gross Receipts includes investment income including interest income. For example, to be considered a QSB for the 2018 tax year, a company would need to have less than $5 million of Gross Receipts in 2018 and have no gross receipts prior to 2014.
WHAT COUNTS AS “R&D”?
The R&D tax credit has a very broad definition based on a four-part test detailed here. Expenses that can qualify include wages paid to employees, supplies, amounts paid to third party vendors for research, and computer rental. BPM has claimed credits on nuclear energy production as well as gummy worms. If you’re wondering if your business qualifies, the best way to find out is to schedule a call with BPM.
WHEN TO MAKE THE PAYROLL TAX CREDIT ON AN ORIGINAL RETURN
A QSB must make the payroll tax credit election on a timely-filed income tax return (including extensions). The election is made by checking the appropriate box under Section D of the Credit for Increasing Research Activities Form 6765.
HOW & WHEN TO USE THE CREDIT AGAINST PAYROLL LIABILITY
Once you have made the QSB election on your timely filed Form 6757, you must file the “transitional” Form 8974 and attach it to your payroll tax return Form 941. The payroll tax credit must be first used in the first quarter after you file your income tax return.
For example, if your income tax return is filed in Q4 of 2019, you must report the payroll offset on the next quarter’s payroll tax return, in this case, Q1 of 2020. Meaning, the sooner you file your income tax return, the sooner you are able to recognize the tax savings.
WHAT ARE THE LIMITATIONS?
When you begin your research on the R&D tax credit, keep in mind the payroll tax offset is limited to 50% of the payroll tax liability for that quarter. If the payroll tax credit exceeds 50% of the payroll tax liability, the excess is carried over to the succeeding quarters until fully exhausted. The credit can be carried forward for 20 years.
BPM has a dedicated R&D tax credit service team that can help guide you through this process. Contact them with any questions you may have!
Carol O’Hara, Consumer Products Industry Leader
Ryan Musser, Senior Manager, Assurance
Photography by Alana Ippolito