Payroll Tax Credit: Good News for Startups!

The new payroll tax credit, first passed in December 2015, is now available for qualified small businesses conducting R&D. BRAYN reviews the requirements and mechanics just in time for tax filing season. Read more to learn how your start up may qualify!

WHAT IS THE PAYROLL TAX CREDIT?

The payroll tax credit refers to a new opportunity for taxpayers who are deemed “qualified small businesses” and perform qualified research to offset up to $250,000 of the employer portion of FICA payroll tax, starting as early as the 2nd payroll tax quarter in 2017.

WHAT KIND OF COMPANIES CAN QUALIFY?

The payroll tax credit is aimed at “startups”, which covers many possible businesses and scenarios.

  • R&D performed otherwise meets all IRC Section 41 & 174 criteria
  • Company must qualify as “qualified small business” for taxable year
    • Taxable year began after 12/31/2015
    • Gross receipts for the taxable year must be less than $5,000,000
    • Did not have gross receipts (as so determined) for any taxable year preceding the 5-taxable-year period ending with such taxable year

For example, “X Start Up Corp” below, qualifies for the Payroll Tax Credit.

However, in 2017 the same company no longer qualifies for the Payroll Tax Credit because it is in its sixth year of positive sales.

The tax credit is not available to companies exempt from tax under section 501(c), but is otherwise available to most companies, if they are developing a product or process that requires an iterative, technical course of action to overcome some level of uncertainty. See the Industries BRAYN serves for specific industry qualifications.

HELPING BUSINESSES WITH AN INFLUX OF CASH FLOW

New businesses are helping drive growth and innovation in the U.S., but generating revenue can take time. A company that isn’t making money may not pay federal or state income tax, but can owe significant payroll tax dollars for creating jobs and investing in people. The payroll tax credit can offset this burden. In total, a company may be able to offset up to $1.25 million of payroll taxes ($250,000 x 5 years).

HOW SOON SHOULD I EXPECT TO SEE A POTENTIAL BENEFIT?

The earliest a taxpayer may claim a Payroll Tax Credit is the payroll tax quarter beginning after the federal tax return (for tax years beginning after 12/31/2015) has been filed. Unless there is a short tax year, a corporate taxpayer that files 03/15/2017 would use the payroll tax offset the following calendar quarter at the earliest, i.e. applied to the second quarter Form 941 due by 07/31/2017.

WHAT ARE THE BASIC MECHANICS?

If a company meets the above criteria, it may offset up to $250,000 of payroll taxes no earlier than Q2 2017.

To do this, Company must:

  • Claim an R&D tax credit on Form 6765
    • Must complete “Section D – Qualified Small Business Payroll Tax Election and Payroll Tax Credit”
    • Allows taxpayer to apply any amount of R&D credit as computed, not to exceed $250,000
  • Complete Form 8974 “Qualified Small Business Payroll Tax Credit for Increasing Research Activities” as instructed
    • Must be attached to Form 941
    • Acts as a kind of worksheet and carryforward schedule for this portion of credit
  • Complete and claim credit as instructed on Form 941
    • Line 15 “Overpayments” provides taxpayer with 2 options: (1) apply to next return, or (2) receive a refund
    • Must attach completed Form 8974

For example, the same startup company mentioned above would claim the R&D tax credits as follows.

* 2016 social security taxable wage limit is $118,500

CARRYFORWARD AND CARRYBACK

Current legislation does not provide for carryforward credits from taxable years beginning before January 1, 2016, and does not provide for carryback of credits to taxable years beginning before January 1, 2016.

If a company generated R&D tax credits prior to 2016, they can still be carried forward for up to 20 years to offset regular income tax liabilities. The same company can generate R&D tax credits after 2015 and carry them forward on a separate schedule to offset payroll tax, as long as the aforementioned qualifications are met.

TAKE ACTION

The election needs to be made on an original tax return, so companies should begin to review their eligibility under the new rules now. BRAYN can assess potential benefit through a no-cost, no further obligation Phase I Assessment and identify information needed to make the election to offset payroll taxes.

To begin a free Phase 1 Assessment, please e-mail Brady Bryan at brady@braynconsulting.com.

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