THE FEDERAL PAYROLL
R&D TAX CREDIT
Background
New businesses or startup companies may be eligible to apply the R&D Tax Credit against their employer payroll tax.
Effective as of December 31, 2015, the Protecting Americans from Tax Hikes Act (PATH Act) of 2015 provided that eligible small businesses and startups may elect to use the federal R&D Tax Credit to offset the employer’s portion of the social security (OASDI) payroll tax liability. These companies can now benefit from their research activities to boost their bottom-line, regardless of whether or not they’re profitable.
The new payroll tax credit is available only to companies that:
•The taxpayer did not recognize any gross receipts for any taxable year preceding
the 5 taxable year period prior to the current taxable year period.
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•Less than $5 million of gross receipts in the current tax year.
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•The taxpayer properly elects to use the federal R&D credits against its employer payroll taxes.
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•Qualifying research activities and expenditures.
The Benefits
Accelerating the depreciation period for your investment frees up capital to reinvest in your company and position it for success, now and in the future.
Businesses pay 6.2% FICA tax, equal to $6,200 for every $100,000 in employee wages.
Immediate cash flow relief by offsetting payroll taxes instead of waiting for profitability.
Extends runway for startups by freeing up funds to fuel product development and growth.
Supports hiring and retention by lowering payroll costs and freeing cash for talent needs.
Reduces investor pressure by showing tangible savings before the business is profitable.
Encourages continued R&D by reducing financial strain and rewarding ongoing innovation.
FREQUENTLY ASKED QUESTIONS
The new payroll tax credit is available only to companies that have no more than $5 million in gross receipts for the current taxable year period and did not recognize any gross receipts in the preceding 5 taxable year period prior to the current taxable year period. The company must also have qualifying activities and research expenditures to be eligible.
The new payroll tax credit is only available to companies that have not recognized gross receipts for the preceding five taxable year periods prior to the current taxable year period. However, a company that was in existence prior to the five preceding taxable periods, but didn’t receive gross receipts, could still qualify. Although the law is intended to benefit small businesses, larger businesses could potentially benefit under the rules as they’re currently written.
A company must have less than $5 million in annual gross receipts in the current taxable year period to be eligible. For businesses that are just starting in the current tax year, their gross receipts must fall under the $5 million limit after being annualized for a full 12 months. Gross receipts are generally characterized as those reported on Line 1c of the company’s federal income tax.