The R&D payroll tax credit is a fantastic tax-savings opportunity for new businesses that have yet to generate taxable income.
Many startup companies and small businesses think they can’t benefit from the R&D tax credit due to operating losses or alternative minimum tax (AMT) limitations. However, provisions were created with the intent to increase the number of startups and small to mid-sized businesses that can benefit from the credit. And, with the new corporate tax rate reduction effective in 2018, the net benefit of the R&D tax credit increases to 79 percent, which is a shift from only 65 percent in prior years.
The R&D payroll tax credit is a fantastic tax-savings opportunity for new businesses that have yet to generate taxable income. Unlike the traditional R&D credit, which can only offset income tax, the R&D payroll tax offset is available to startups with under $5 million in current-year gross receipts, and that have had gross receipts for no more than five years. For example, a startup tech company generates a $25,000 research credit and has an estimated FICA liability of 30,000 for the year. Under the new legislation, they can now use their $25,000 R&D tax credit to offset their FICA liability from $30,000 to $5,000.
Another consideration for owners of pass through tech companies (partnerships and S corporations) is that AMT may limit the ability to utilize any R&D tax credits generated. However, for businesses with an average of the prior three years gross receipts of $50 million and under, the R&D tax credit can offset this AMT liability. This provision provides small businesses with an increased ability to reinvest in their companies and further innovation and new product development.
There are planning opportunities and risks involved in determining research credits for tech companies, including addressing IRS documentation requirements, applying the related-party aggregation rules, and assessing options to maximize the credit. To learn more about how your company might benefit from new provisions of the research credit rules, please contact us.