Updated: Mar 10, 2020
The R&D tax credit payroll-tax offset allows companies ("qualified small business") to receive a benefit for research expense activities even if they aren’t profitable. A qualified small business may elect to claim up to $250,000 of R&D tax credits annually as a payroll tax credit against its employer share of Social Security old age, survivors, and disability insurance (OASDI) taxes for up to five years ($1.25M in cash savings regardless of income tax liability).
The payroll tax credit is not limited to R&D employees but rather can be used to offset the employer’s share of OASDI taxes for all employees. The maximum amount of the credit that can be elected to offset payroll taxes in a given year is $250,000, and the election can only be made for five tax years. The payroll tax credit is enabled by IRC sections 41(h) and 3111(f).
To be eligible for the R&D tax credit payroll offset, companies must meet these qualifications:
Gross receipts for five years or less (e.g. interest income counts toward gross receipts)
Less than $5 million in gross receipts in the year the credit is elected
Have employees and incur payroll-tax liabilities (FICA taxes)
May elect the payroll tax credit in an amount not to exceed $250,000 per year, for a maximum of five years
Any excess above the $250,000 may be utilized traditionally (offset income tax liability) in current or future years subject to carryforward limitations as an additional benefit
Organizations exempt from tax under Sec. 501 (e.g. "non-profits") are not eligible to claim the payroll tax credit
Must make an election in section D of Form 6765 on an originally filed return to claim the payroll tax credit on or before the due date of the tax return,