AAFCPAs would like to make clients aware of the significant benefits available to small businesses as a result of provisions enacted in the Protecting Americans from Tax Hikes Act of 2015 (“PATH Act”). The Research Credit may now be applied to offset payroll taxes for start-up businesses.
Who do these new provisions of the PATH Act apply to?
Historically, innovative small companies were unable to claim the Research Credit if they were not profitable, as they paid no federal income taxes against which the research credit could be taken. Instead, the Research Credit was carried forward 20 years. However, beginning January 1, 2016, the new start-up provision of the PATH Act contains a new provision to assist young businesses that incur substantial research expenses, but are not yet profitable. The amendment to IRC 41 allows a qualified small business to take the credit against certain payroll taxes, beginning in 2017. The legislation defines a qualified small business as a corporation (including an S corporation) or a partnership or an individual with gross receipts of less than $5 million for the current tax year, and no gross receipts before 2012.
What types of payroll liabilities may be offset?
A taxpayer who meets this definition may utilize the Research Tax Credit against the employer portion of the Social Security tax, equal to 6.2% of covered wages. The PATH Act limits the portion of the Research Tax Credit to be utilized against a maximum of $250,000 in the employer’s share of Social Security taxes, measured on an annual basis.
When is the Research Credit for start-ups applicable?
In order to take advantage of this opportunity, an election must be made on your 2016 income tax return that identifies the credits to be used for the payroll offset. The offset would then be available for calendar quarters following the filing of the income tax return on which the election is made.
While the Research Credit may now be used to offset payroll tax liabilities, AAFCPAs recommends a cost benefit analysis be performed to ensure it makes sense to take the credit. AAFCPAs is available to advise start-ups in planning for and navigating the significant nuances of the new legislation, and to ensure you maximize your potential benefit.