Tech Companies Receive New Avenue to Enjoy the R&E Tax Credit
By Gary Wells, CPA / Esq, Of Counsel, BILTgroup
Gregory Bryant CPA / Esq, Managing Partner, BILTgroup
Early stage technology companies have a new way to convert income tax credits that arise from R&D efforts into payroll tax credits that may immediately benefit the companies.
Many early stage companies do not want to incur costs to have a tax credit study conducted to harness “research and experimentation” tax credits (“R&E Credits”) because they are pre-revenue, and do not foresee having federal income liability for a long time. Now these R&E Credits can be used to pay the company’s payroll taxes.
The Protecting Americans from Tax Hikes Act of 2015 introduced Code § 41(h) which offers small business the opportunity to utilize the research & experimentation (“R&E”) income tax credit against their employer portion of the old-age, survivors, and disability insurance (“OASDI”) tax (FICA), or termed the payroll tax credit (“PTC”). The IRS announced last week the basic rules for claiming the credit for calendar year 2016 and forward in IRS Notice 2017-23. Many businesses could not enjoy the benefit of the R&E tax credit due to little or no taxable income, a prerequisite before § 41(h). A small business may utilize up to $250,000 of its R&E credits as a payroll tax credit and decrease their out-of-pocket payroll tax costs.
The following basic requirements apply to calendar year 2016:
1. Entity has no gross receipts in any tax return 5 years or more before the current year
2. Current year gross receipts less than $5 million
3. Quantify, report, and elect payroll tax credit on entity’s federal tax return
4. After filing the entity’s federal income tax return, then entity may use PTC on next (and succeeding) employer return to the extent of the employer’s OASDI liability
For example, X Company had no gross receipts in 2012 and all years prior and gross receipts less than $5 millions for years 2013 to 2017. X Company quantified R&E tax credits of $250,000 for calendar years 2015 and 2016 and a 2017 credit of $300,000. X Company may utilize the PTC for 2016 and 2017 up to $250,000 per year and apply the amount against its employer FICA liability for the quarters following the filing of the annual federal income tax return. It will carryforward the 2015 credit because the PTC benefit begins in 2016 and the excess amount from 2017, or $50,000 ($300,000-$250,000 limit).
Now it makes sense to quantify these credits at an earlier time because they can generate an immediate benefit in 2017.