The Protecting Americans from Tax Hikes Act of 2015 introduced Code § 41(h) which offers small businesses an opportunity to utilize research & experimentation (“R&E”) income tax credit against the employer portion of the old-age, survivors, and disability insurance (“OASDI’”) tax, commonly known as employer FICA. Generally, the R&E income tax credit allows businesses to reduce their entity level taxes (corporate or pass-through to owners). In many cases, a start-up is in pre-revenue stage and won’t be able to benefit from an R&E income tax credit until it reaches profitability which may take a number of years to achieve. The Payroll Tax Credit (“PTC”) allows start-up businesses to monetize the R&E benefit while in the pre-revenue stage and immediately offset its employer payroll costs. The PTC amount is treated as a payment on the employer’s next filed Quarterly or Annual Federal Tax Return, Form 941.
IRS and Department of Treasury provided operational rules for 2016 that allow at least for the 2016 tax year an extension of time for taxpayers to make the election on or before December 31, 2017 to treat R&E tax credits as a Payroll Tax Credit and claim the benefit against the next payroll tax filing. It is expected that for subsequent years, eligible small businesses must make the election by the tax return date (including extensions).
Eligible taxpayers that have not made an election and claimed the PTC for 2016, but desire to do so, should move quickly to do so before yearend. Otherwise, any R&E benefit for 2016 must be treated as an income tax credit, not a PTC. However, the failure to elect the PTC in 2016 does not impact subsequent tax years, i.e., a PTC generated solely from qualified activities undertaken in 2017, etc.
An eligible start-up may elect to claim up to $250,000 per year as a Payroll Tax Credit. There are a number of requirements and taxpayers should consult a tax professional to determine what, if any, benefit may be claimed.
Contact the author at gwells@wellstaxconsultingllc.com.