When the Protecting Americans From Tax Hikes (PATH) Act of 2015 was enacted on December 18, 2015, one of the provisions of the Act retroactively renewed the research and development (R&D) credit and made it permanent.
The PATH Act also added that qualified small businesses (QSB) can use the R&D credit against their payroll tax liability. Prior to the passage of this Act, it could only be used against income tax liability. A qualified business can now elect to apply up to $250,000 of the credit against the employer portion of the Social Security Taxes.
What is a qualified small business? It is a corporation (including an S-corporation), a sole proprietorship or a partnership with gross receipts of less than $5 million for the taxable year and that did not have gross receipts for any taxable year before the five-year period ending with the year of the claim. For example, if electing to use for the 2016 tax year, the business could not have any gross receipts before the 2011 taxable year. This provision is trying to help companies that are just getting started. A tax-exempt organization is not eligible.
How is the election filed? The payroll tax credit election is made by completing the Form 6765, Credit for Increasing Research Activities, and including this form with the timely filed (including extensions) business tax return. A QSB is limited in the number of years it can make the election.
What if I already filed my business return for 2016 and didn’t know about this election? There is a special rule for the tax year 2016 that allows a small business to still make the election by filing an amended return by December 31, 2017. To qualify for this extension of time to make an election, the QSB must either 1) indicate on the top of its Form 6765 that the form is “Filed Pursuant to Notice 2017-23” or 2) attach a statement to its Form 6765 that it was filed pursuant to Notice 2017-23.
How is the payroll tax credit claimed? The QSB will claim the payroll tax credit on the payroll quarterly reports, beginning with the first quarter immediately following the filing of the income tax return with the election. Form 8974, Qualified Small Business Payroll Tax Credit for Increasing Research Activities, must be attached to the payroll tax return.
Another provision of the PATH Act is that Eligible Small Businesses (ESB) are able to use the R&D Credit to offset their alternative minimum tax (AMT) liability.
What is an eligible small business? An ESB is defined as a corporation whose stock is not publicly traded, partnership or sole proprietorship, but with much higher gross receipts than required for a QSB. An ESB is a company with less than $50 million in average gross receipts over the last three years. If your business has not been in existence for 3 years, base your average on the period the business has existed.
With these changes, the R&D credit has become even more valuable than it was previously and offers great tax savings to businesses across various industries. With this opportunity available, be sure to talk to your tax advisor to see if your company might be eligible for this credit and be able to take the PATH to tax savings.
A little more about us:
Located in West Des Moines, Iowa with a branch office in Winterset, Iowa, McGowen, Hurst, Clark & Smith, P.C. celebrates 65 years of extending excellent service to our clients, providing them with accounting, auditing, consulting and investment expertise.
Established in 1946, our staff has grown from 3 to 60 employees, making us large enough to provide our clients with a broad base of experience and resources, yet small enough to offer very personalized service—which we feel makes us stand apart from other CPA firms. In addition to the traditional services of Accounting, Tax Preparation, Audit and Business Consulting, MHC&S offers our clients specialized services including Estate Planning, Business Valuations, Cost Segregation Studies, Retirement Planning, QuickBooks Training, Financial Advisory Services, Fraud Detection and Deterrence, Business Succession Planning, Litigation Support and more.
MHC&S is a member of CPAmerica International, Inc., a national association of accounting firms offering membership to only 90 firms throughout the United States. This association offers a wide pool of additional technical expertise to the members firms, as well as continuing professional education necessary to maintain the degree of excellence which MHC&S feels is vital in today’s business environment.