Use it or lose it: Deadline for startups to claim R&D Credit looms

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Startup businesses have one last chance to claim a valuable credit, experts say – but they need to act fast.

Before 2016, businesses could only take the Research & Development Credit against their income tax liability. But a provision in the Protecting Americans from Tax Hikes Act, or PATH Act, of 2015, allows eligible small businesses to apply part or all of their research credit against their payroll tax liability, instead of their income tax liability. The option is meant to benefit startups that have little or no income tax liability. The new option was available for the first time for 2016 returns, but under a special rule for tax-year 2016, a small business that failed to choose this option can still make the election by filing an amended return by Dec. 31, 2017.

“This is a tremendous opportunity for startups, but the deadline is approaching rapidly,” said Michael Silvio, tax director at Hall & Co. CPAs. “Under the rules, small-business startups may claim up to $250,000 in credits per year against the payroll tax liability instead of the income tax liability. Eligible firms can earmark the credits against payroll for the first quarter after the filing. Businesses that did not have time to get an R&D analysis in before returns were due have another shot at claiming these tax credits in the first quarter of 2018.”

“Businesses that miss the deadline will miss the opportunity to earmark any 2016 R&D credits against payroll taxes,” he said.

According to Silvio, the credits themselves offer substantial savings to companies that develop new or improved products, processes or software, and which meet the following four-test criteria:

  • 1. Technical uncertainty: The activity works to eliminate technical uncertainty about the development or improvement of the product or process.
  • 2. Process of experimentation: The activity involves some form of experimentation to eliminate or resolve the technical uncertainty.
  • 3. Technological in nature: The experimentation process adheres to a hard-science standard such as engineering, computer science, chemistry, physics, etc.
  • 4. Qualified purpose: The purpose of the activity is to create a new or improved product or process.

“The extended deadline applies to new businesses in existence less than five years, with gross receipts of less than $5 million in the tax year,” said Silvio.

A small business may choose the option by filling out Form 6765, “Credit for Increasing Research Activities,” and attaching it to a timely filed business income tax return. A small business then claims the payroll credit by filling out Form 8974, “Qualified Small Business Payroll Tax Credit for Increasing Research Activities.” This form must be attached to its payroll tax return.

“If a business meets the qualifications to claim the R&D credit against payroll tax liability, it must begin the process now by conduction an AR&D analysis as necessary and gathering documentation as soon as possible,” said Silvio. “Don’t forgo the immediate benefits of the IRS extension!”

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R&D credit Tax credits Corporate taxes PATH Act