The Research & Experimentation tax credit, also referred to as the “R&E”, “R&D” or “Research” tax credit incentivizes companies to invest in people and technology that can lead to growth in revenues and profitability, as well as to promote job retention and expansion. The credit focuses on three types of expenditures: qualified wages, supply costs and contract research.
Since its inception in the 1980’s, the research credit (along with other so-called “tax extenders”) has existed on a renewable basis; usually for 2-years, but only for one year in 2014. This made it challenging for companies to track the eligible expenditures for the credit, since it was not known if the credit would be in place when it came time to file for it.
The Protecting Americans from Tax Hikes Act of 2015 addresses this issue. Along with other business and personal tax incentives, the Research & Experimentation tax credit has finally been made permanent, meaning the credit will continue to be in effect for 2015 and beyond.
In addition to other changes, there was a significant enhancement to the credit which is particularly attractive to start-up companies for tax years beginning after December 31, 2015.
Under the new regulations, a qualified small business may elect to apply the research credit as a payroll tax credit against its OASDI (social security) liability instead of its income tax liability. For this purpose, a qualified small business is defined as:
- A corporation or partnership with gross receipts of less than $5 million for the taxable year, and
- A company with no gross receipts for any taxable year preceding the five-year taxable period ending with the taxable year.
The research credit can offset up to $250,000 in payroll taxes per year. The election by start-up companies to offset payroll taxes may be claimed up to five times, meaning that the credit could potentially offset as much as $1.25M in payroll taxes over a five-year period.
The credits against payroll taxes may be taken in the calendar quarter following the date the company’s income tax return is filed. For example, if the company filed its 2018 income tax return on April 1, 2019, which is in the second calendar quarter of 2019, then the credits can be used against the payroll tax liability for the third calendar quarter of 2019. If the credit amount is greater than the payroll tax liability, excess credits may be carried over to the next calendar quarter.
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Research & Experimentation Tax Credit Services Overview