R&D Credit Lessens Payroll Tax Liability for Startups

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For startups and small businesses with gross receipts of less than $5 million, the IRS has allowed up to $250,000 of an R&D credit to be applied against the company’s payroll tax liability.

IRS Code Section 41 – R&D credit – was created to give startups an added benefit in the processes of conducting research in the name of innovative product creation, even if these activities are not profitable. So how do you, as a startup, use the R&D credit to offset your payroll tax liability?

Taking advantage of the R&D credit

Assuming you did not incur any gross receipts prior to 2012, you have two options to maximize your R&D credit for your 2016 tax year, but the election must be done prior to December 31, 2017.

  • Haven’t filed your 2016 business income tax return? Timely file your 2016 return accompanied by a completed Form 6765 – R&D Credit.
  • Already filed your 2016 business income tax return? File an amended 2016 return, by December 31, 2017, accompanied by a completed Form 6765 – R&D Credit.

How do you claim the R&D payroll tax credit? The key is filling out Form 8974, Qualified Small Business Payroll Tax R&D Credit, and attaching it to your payroll tax return on a quarterly basis.

Ask Our Experts

Kevin McNulty, Principal Kevin McNulty, Principal, EA, MBA
T (212) 829 3236
kmcnulty@withum.com

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The information contained herein is not necessarily all inclusive, does not constitute legal or any other advice, and should not be relied upon without first consulting with appropriate qualified professionals for your individual facts and circumstances.

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