CPAs and tax professionals should be alert to the opportunities for small businesses to claim the research credit, according to Barbara Weltman, author of “J.K. Lasser’s Small Business Taxes 2017.”
“It’s been estimated that more than 70 percent of eligible small businesses don’t claim the research credit to which they are entitled,” she said. “But there are two bills currently in the Senate and the House, S. 650 and H.R. 1543, that would help alleviate the lack of knowledge about this credit,” she said.
S. 650, the Support Small Business R&D Act of 2017, has bipartisan support. It was unanimously advanced by the Senate Small Business and Entrepreneurship Committee on Aug. 2, 2017. It would require the IRS and the Small Business Administration to train small-business owners and start-ups about the research credit. The House bill would do the same.
The bills would require that, not later than 180 days after the date of enactment, “the Administrator [of the Small Business Administration] in consultation with the Commissioner [of the IRS] shall develop partnership agreements” that provide for the development of basic training, “including in-person or modular training sessions relating to federal income tax credits that benefit small business concerns and startups, especially credits for research and experimentation, and information al materials relating to the credits.”
“They believe that even though the credit is on the books, many businesses aren’t using it because they don’t know about it,” Weltman said. “There’s a certain amount of record-keeping that is necessary. For example, the business has to track salaries applicable to R&D activity so it knows what to claim the credit on. There’s a lot of ignorance on that point.”
The Protecting Americans From Tax Hikes, or PATH Act included a provision that made the credit even more favorable to small businesses and startups, Weltman noted. “Even if you don’t have any revenue, you can use the credit to offset up to $250,000 of the Social Security portion of the employer’s share of FICA,” she said. “If the business has revenue, it gets a dollar-for-dollar savings on taxes.”
To qualify for the payroll tax credit for the current tax year, a business must have gross receipts of less than $5 million and could not have had gross receipts prior to 2012. An eligible small business chooses this option by attaching a filled-out Form 6765, Credit for Increasing Research Activities, to its timely-filed income tax return. Form 8974, Qualified Small Business Payroll Tax Credit for Increasing Research Activities, is used to determine the amount of the qualified small-business payroll tax credit for increasing research activities that can be claimed on Form 941, Employer’s Quarterly Federal Tax Return.
Weltman noted that there is a special rule for tax year 2016 that many aren’t aware of: “It allows a small business that failed to choose the option to claim the credit against its payroll tax on its 2016 return.” Businesses can still make the election by filing an amended return by Dec. 31, 2017. IRS Notice 2017-23 gives further details.
Businesses don’t always realize that their activities constitute research, Weltman observed. “They think of Edison inventing the lightbulb,” she said. “But, for example, new regulations allow the credit for internally developed software in certain circumstances.”
Weltman foresees the credit remaining alive and well under tax reform. “My guess is that it will be enhanced rather than diminished,” she said. “There is a tremendous amount of bipartisan support for it.”
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