Expertise Beyond the Numbers

Tax Alert: R&D Tax Credit Update for Startups and Small Businesses [Blog Post]

Are you taking full advantage of the R&D tax credit to accelerate results and offset costs? In the following blog post, Angelo Poletis and Rick Happel with SC&H Group’s Tax Services team provide start-ups and fast growth companies with an important R&D tax credit update.

Many business owners in nearly every industry are unaware that federal and state research and development (R&D) tax credit programs exist that may reward their day-to-day efforts aimed at producing an improved product.

The R&D tax credit is a government-sponsored benefit that provides cash incentives for companies conducting R&D in the U.S. These economic incentives were implemented to stimulate research and development in industries of all sizes, to encourage companies to work together, and to transform the economic landscape.

As part of the Protecting Americans from Tax Hikes Act of 2015 (PATH), the R&D credit was extended and expanded to benefit even more taxpayers. The PATH Act permanently extended the credit to give taxpayers more certainty about its future and the applicable tax benefits.

The Path Act made two significant changes to help small businesses as follows:

  • Starting in 2016, eligible small businesses ($50 million or less in gross receipts) may claim the credit against the Alternative Minimum Tax (AMT) liability.
  • Certain start-up businesses can elect to use the R&D credit (up to $250,000 in credit) against the employer’s payroll tax liability.

Start-up businesses normally do not generate taxable income in their early years. However, using the R&D credit to help offset payroll taxes may allow start-ups to hire more employees and accelerate progress.

In order for start-up taxpayers to utilize the payroll tax offset, they must have had gross receipts for five years or less; a company is not eligible if it generated gross receipts prior to 2012. In addition, the taxpayer must have less than $5 million in gross receipts for 2016 and for each subsequent year that the payroll tax credit is elected.

If a company meets the qualifications above, and has valid R&D expenditures, the company would calculate and claim the credit on its 2016 federal income tax return. The calculated credit would then be available to claim on the taxpayer’s 2017 payroll tax returns (Form 941).

Because the credit is first calculated on the taxpayer’s 2016 federal income tax return (filed in 2017), the earliest the company could likely receive a benefit for the payroll tax offset would be for the second quarter’s payroll tax liability filing.

Are you taking advantage of the R&D tax credit to accelerate results? If you’d like to speak with SC&H Group’s tax specialists about how they can help your organization claim the R&D tax credit, or any other applicable tax credit, please contact us here.