Even though small start-up entities often have little to no income tax liability, they can choose to apply the research credit to their payroll tax liability for taxable years beginning after Dec. 31, 2015. Earlier this year, the IRS rolled out a new option enabling businesses to apply part or all of their research credit against their payroll tax liability, instead of just their income tax liability.
With the credit, up to $250,000 can be applied to a company’s payroll tax liability. Tax-exempt organizations are not eligible for the credit.
To qualify, a small business must have qualifying research expenses and gross receipts of less than $5 million and no receipts prior to 2012, for this year’s election. First, Form 6765, Credit for Increasing Research Activities must be completed. Once the election is made, the credit can be claimed by completing Form 8974, Qualified Small Business Payroll Tax Credit for Increasing Research Activities, which must be attached to its payroll tax return.
If a qualified small business failed to make the election with its return this year, there’s still time to take the election by filing an amended return on or before Dec. 31, 2017. Be sure to indicate on the top of Form 6765 that it is “Filed Pursuant to Notice 2017-23.”
By Lesley Mast, CPA, MAcc-Taxation (Wooster office)