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, including extensions
Form 6765 permits the taxpayer to elect the amount they wish to be designated as the payroll tax credit
If the taxpayer elects the payroll tax credit in an amount greater than their payroll tax liability for the following calendar quarter, the remaining credit shall be carried forward to the subsequent quarter(s) to be used against payroll taxes
Election and Timing Considerations
In general, the R&D credit is first elected on the taxpayer’s annual federal income tax return filing, then reported on a federal payroll tax return (i.e. Form 941), generally filed quarterly, before the taxpayer can start to apply the credit against payroll taxes in subsequent quarters.
For example, a taxpayer intending to claim the R&D tax credit against payroll taxes may file their income tax return with the proper elections by September 15th ("Q3" or third quarter of the year), and would apply the credits against payroll taxes in the fourth quarter ("Q4").
However, managing various deadlines and coordination between your tax preparer, R&D tax credit consultant (e.g. AndreTaxCo), payroll processors, and the IRS is key to successful and timely R&D tax credit payroll offset claims. Many payroll service providers (PSP) or professional employer organizations (PEO) have their own internal deadlines for when documentation must be submitted to process the credit. Some payroll providers may require documentation several weeks to several months in advance of IRS-imposed filing deadlines.
AndreTaxCo's Here to Help!
Coordinating between various tax professionals, payroll companies, and the IRS can appear daunting. However, AndreTaxCo can help you complete the process from beginning to end and ensure you avoid common mistakes encountered by most taxpayers.
To learn more whether you’re eligible for the R&D payroll tax credit or for additional background, contact AndreTaxCo today for a free assessment!