Many companies book substantial development expenses either in early years or on an ongoing basis that qualify as Research Expenditures for purposes of the Code Section 41 credit for increasing research activities (often called the “Research Credit” or the “R&D Tax Credit”). The credit, which became permanent in 2015 after nearly thirty years of temporary extensions, incentivizes research activities by reducing income taxes due by an amount tied to the sum of certain qualified expenses. These can include a variety activities, such as software or web development, creation of prototypes, and improvement of production processes.
The problem with tax credits is that they only help to reduce taxes due. Development or growth stage startups with net operating losses in early years must carry forward any allowable tax credits to future years when the company has positive net income.
Starting with tax year 2016 income tax returns and 2017 payroll tax reports, employers that have gross receipts of less than $5 million a year may be eligible to take a payroll tax credit for qualified research expenses. Eligible companies can apply the credit, which is limited to $250,000, against any Social Security tax liability for each quarter when Form 941 is filed. The benefit to companies that elect to employ their research credits in this way is that, while income taxes may not be due for years, payroll taxes are due and payable in the month or quarter the company accrues them.
The IRS has released draft copies of the proposed 2017 versions of Forms 6765 (for the Research Credit) and 941 (for payroll taxes). Taxpayers will need an additional form (Form 8947 yet to be released as of this writing) to calculate the amount of credit allowable on Form 941.
If you would like to find out how your company can benefit from the Research Credit or if you need assistance converting your credit carryovers to cash, contact us.