November 09, 2017
Taxpayers still have time to take advantage of the election to offset the Research and Development (R&D) tax credit against payroll tax liability. An amended return is permitted until December 31, 2017, to allow taxpayers to file a late election for taxable years beginning after December 31, 2015.
What Is the Election?
The Protecting Americans from Tax Hikes (PATH) Act created a new election under Section 41(h) and 3111(f) of the Internal Revenue Code that allows a qualified small business to elect to apply a portion of the Section 41(a) R&D tax credit against the employer portion of payroll taxes, specifically the Social Security tax portion, for taxable years beginning after December 31, 2015. The payroll tax credit election can be up to $250,000 per taxable year and the taxpayer can make the election up to five years if certain requirements are met.
What Is a Qualified Small Business?
A “qualified small business,” with respect to any taxable year, is a corporation (including an S corporation) or partnership which has less than $5,000,000 in gross receipts for the taxable year and does not have gross receipts for any taxable year preceding the five-year taxable period ending with such taxable year (for example, a calendar-year taxpayer could not have any gross receipts prior to the December 31, 2012, tax year). The definition can also apply to a person and would take into account gross receipts from all trades or businesses.
What Are Gross Receipts?
The definition of “gross receipts” for purposes of Section 41(h) is a more inclusive calculation than what is typically used for R&D tax credit calculations. Gross receipts generally include most types of income, but excludes Schedule D gains/losses, and there is no exclusion for de minimis amounts of gross receipts. The controlled group rules must also be adhered to for the gross receipts tests, which means that members of a controlled group should be aggregated to determine eligibility for all members of the controlled group.
How Do You Make an Election?
A qualified small business may make a payroll tax credit election for any taxable year beginning after December 31, 2015, by completing the appropriate section of Form 6765, Credit for Increasing Research Activities, and filing the completed form with the taxpayer’s timely filed (including extensions) tax return. If a return for a taxable year beginning after December 31, 2015, was filed timely but the taxpayer failed to make the election, an amended return including required language or a statement may be filed on or before December 31, 2017, to make the election.
How Do You Claim the Credit?
The payroll tax credit may be claimed on the quarterly employment tax filing for the first quarter that begins after it files the return reflecting the election. For example, if a taxpayer files an income tax return making the election on March 15, then they would be eligible to claim the credit on their second quarter payroll tax filing (which covers April through June). However, if the taxpayer filed an amended return to make a late election on December 15, then they would have to wait until the first quarterly payroll tax filing of the following year. The credit is claimed by completing the Form 8974, Qualified Small Business Payroll Tax Credit for Increasing Research Activities, and filing the completed form with the employment tax return. The taxpayer can begin utilizing the credit against monthly or semiweekly payroll tax liability deposits, but the credit can only be claimed against deposits that will be covered by a Form 8974. This allows the taxpayer to reduce their liabilities on a timely basis as the payments are due, instead of waiting until the quarterly forms are filed to recognize the benefit.
Are There Credit Utilization Limits?
The amount of credit per quarter is limited to the employer portion of the Social Security tax paid on wages for that quarter. The excess credit is carried over to the succeeding quarters where the same limitation is applicable. Note that a Form 8974 should be filed every quarter that payroll tax credit will be utilized against the payroll tax liability. Current guidance does not limit the carryforward period of the payroll tax credits under Section 41(h).
If an income tax return for a period beginning after December 31, 2015, has been recently filed without the payroll tax credit election, there is a limited time until December 31, 2017, when eligible taxpayers are allowed to file amended returns to make the election. If you would like to discuss if your company qualifies for the R&D tax credit or for the payroll tax credit election, please contact your Eide Bailly professional or a member of the R&D tax incentives team.