This past October, we highlighted some important proposed changes to R&D Tax Credit law. Of particular note was the potential for qualified small businesses to use the R&D tax credit to offset a portion of their payroll taxes, not just income taxes. At the time of that first writing, the IRS had only released new drafts of Forms 941 and 6765 (Employer’s Quarterly Federal Tax Return and Credit for Increasing Research Activities, respectively). But just this Thursday, the IRS issued an official notice on the matter, and small businesses, particularly start-ups, will want to take note.
IRS Notice 2017-23 allows an eligible small business that has qualifying research expenses to apply up to $250,000 of its research credit against its payroll tax liability. That’s really good news for small startups that have little to no income tax liability (the R&D Credit was never available to them before). To qualify, the business needs to have gross receipts under $5 million and no gross receipts before 2012.
Already filed this year? No worries. As a special rule for 2016, a small business that didn’t originally choose this option but now wants to can make the election by filing an amended return by December 31, 2017.
The R&D Tax Credit was made permanent under the Protecting Americans from Tax Hikes (PATH) Act of 2015, is widely popular, and is expected to survive any tax reform legislation that will pass in 2017. This most recent expansion has the potential to greatly affect your bottom line, so don’t hesitate to take advantage of it.