Small businesses often face heavy tax burdens when getting started, which may impede their ability to innovate. Fortunately, startups can use their research and development (R&D) activities to receive tax credits.  When trying to claim R&D tax credits, one of the ways a business can reduce its tax burden is to claim the R&D tax credit against payroll taxes. The Protecting Americans from Tax Hikes Act of 2015 (PATH Act) changed the R&D tax credit from temporary to permanent while allowing companies to claim the credit against payroll taxes, providing taxpayers with another method to save money on Tax Day.

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There are several criteria a business must meet to be able to claim the R&D tax credit against payroll taxes, including:

  • Maximum amount that can be elected to offset payroll tax is $250,000. Due to the Inflation Reduction Act of 2022 (IRA), the cap will increase to $500,000 starting on tax years from January 1, 2023.
  • Gross receipts must be under $5 million within the past five tax years.
  • Have payroll tax liability
  • Election must be made on or before the due date of the taxpayer’s income tax return (including extensions) in Section D on IRS Form 6765 Credit for Increasing Research Activities
  • Credit is claimed against payroll taxes on the taxpayer’s Form 941 Employer’s Quarterly Federal Tax Return for the first quarter beginning after the income tax return making the election was filed. This is done by filling out Form 8974.

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Once a company has fulfilled all the requirements, there are several benefits to claiming R&D tax credits against payroll taxes.

  • Businesses can use 10% of R&D expenses to offset payroll taxes. For example, if a company had $300,000 in R&D expenses, it could use $30,000 to offset payroll taxes.
  • R&D credit-eligible spending may result in a 10-cent per dollar tax credit.
  • More money can be used to improve the business.

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Trying to figure out how to use R&D tax credits to offset payroll taxes requires complex calculations. MainStreet simplifies the process while saving small businesses time and money. For help with claiming tax credits, contact us today.

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