The Protecting Americans from Tax Hikes Act of 2015 significantly enhanced the Research and Development Tax Credit Program on myriad levels by making the program a permanent tax incentive within the Tax Code and considerably restructured the program.
The program allows eligible small businesses (i.e., with $50 million or less in gross receipts) to claim the RTC against the Alternative Minimum Tax for tax years beginning on or after Jan. 1, 2016; and
It also enables eligible startup companies (i.e., those with less than $5 million in gross receipts and earning revenue for less than five years) to claim up to $250,000 of the research tax credit against the company’s federal payroll tax for tax years beginning on or after Jan. 1, 2016.
Since the inception of the enhanced Research Tax Credit Program for eligible startup companies, there have been many inquiries regarding the actual scope and application of the RTCP, including how and when the Internal Revenue Service will issue these refunds. Thankfully the suspense is finally over. For calendar year-end startups that timely filed their tax returns by March 31, 2017, their refund checks were issued and received throughout the month of August, based upon second-quarter withholding filings completed this past July.
Scope and Application for Startups
Specifically, startup companies with less than $5 million in gross receipts in the current taxable year (and that have no gross receipts for any taxable year prior to the five taxable year period ending with the current taxable year) can offset the employer portion of Old-Age, Survivors, and Disability Insurance by up to $250,000 for each year.
Here are the guidelines for eligible startup companies:
• If gross receipts are less than $5 million in 2016, then the business must have no gross receipts before 2012;
• Taxpayers must make an annual election specifying the amount of its RTC (i.e., not to exceed $250,000) used as a payroll tax credit, on or before the due date of its originally filed tax return, including extensions. After making the election, businesses may begin to offset the employer portion of OASDI in the following calendar quarter. As a caveat, it should be duly noted that revoking the election requires permission from the Secretary of the Treasury; and
• Social Security tax amounts up to 6.2 percent of an employee’s social security taxable wages for the calendar year (e.g., the 2016 social security taxable wage limit is $118,500).
There’s also a mandatory three-step tax compliance reporting requirement to properly offset payroll tax with the RTC:
1. File Form 6765, Credit for Increasing Research Activities, and be sure to make an annual election to specify the amount of RTCs that will be applied to the employer-portion of Social Security tax. Note: An annual election to apply RTCs can be made for up to five years.
2. File Form 8974, Qualified Small Business Payroll Tax Credit for Increasing Research Activities. This is a new form that businesses must utilize to report the amount of RTCs elected on Form 6765 to offset Social Security tax. The form will be filed with Form 941 each quarter the credit is applied to the Social Security tax liability.
3. And finally, file Form 941, Employer’s Federal Quarterly Tax Return, to be able to include the amount reported on Form 8974 each quarter.