Last fall, we brought to your attention changes in R&D tax credit law that had the potential to bring more money to your business. These changes, a result of the PATH Act, included using the research and development (R&D) tax credit to offset up to $250,000 of the Social Security portion of payroll taxes, and expansion of the credit so that qualified small businesses (mainly start-ups) could use it to both offset payroll taxes and Alternative Minimum Tax (AMT) tax. Today, newly released drafts by IRS are helping businesses prepare for the revamped R&D credit.
The IRS has released new drafts of Form 941 (Employer’s Quarterly Federal Tax Return) and Form 6765 (Credit for Increasing Research Activities). And while these drafts aren’t meant to be used for filing purposes (final versions will be available towards the end of 2016 or the early part of 2017), they do give us some idea of what to expect when we seek to claim the R&D credit to reduce payroll or AMT liabilities.
What Are the Changes?
The changes in the drafts of Forms 941 and 6765 focus mainly on where to report R&D credit offsets. Changes to the draft Form 941 highlight the opportunity for qualified small businesses to offset their payroll tax liabilities, while changes to the draft Form 6765 highlight the opportunity for eligible small businesses to offset their AMT liabilities.
The draft includes two new line items:
- Line 11, “Qualified small business payroll tax credit for increasing research activities,” is specifically for entering R&D credit information. Line 11 requires Form 8974, which has yet to be created, to be attached.
- Line 12, “Total taxes after adjustments and credits,” guides users through tallying the total deposits.
Part II has been amended to include Line 12’s calculation for determining whether an employer is a monthly or semiweekly schedule depositor.
In the previous version of Form 941, the subtotal calculations (i.e., total taxes after adjustments) did not include any credits to reduce an employer’s possible quarterly tax liability.
The draft includes a new section, Section D, Qualified Small Business Payroll Tax Election and Payroll Tax Credit, for taxpayers to use in order to elect and compute the small business payroll tax credit. Those amounts then flow through to the new 2017 (draft) Form 8974, Qualified Small Business Payroll Tax Credit for Increasing Research Activities. This form is used to determine the amount of the credit allowable for the applicable period and is filed in conjunction with Form 941.
Do I qualify to the R&D credit?
As previously discussed, the R&D credit is one of the most underutilized tax savings strategies in business. Chances are, you are doing something that qualifies you for the R&D credit. Activities include:
- Developing or testing new products and materials
- Developing new or enhanced formulations or combinations of existing products
- Testing new concepts
- Improving existing products
- Conducting trial and error experiments
- Designing tools, jigs, molds or dies
- Developing or improving production or manufacturing processes
- Developing, implementing or upgrading systems and/or software
If you’re unsure if you qualify, commissioning an R&D study can determine eligibility. You want to look into it. Many states offer their own R&D credits or incentives that can often be claimed for the same expenditures that qualify for the federal credit. That’s a lot of money to leave untouched.
All changes found in these drafts indicate how the IRS is planning to accommodate legislative changes in its forms. Don’t get too wrapped up in the line item details (that’s our job). The take-away for you here is to know that these changes to R&D law have the potential to greatly benefit your business. Be prepared to take advantage of what’s available to you.