Cap for Federal R&D Withholding Benefit to Increase for 2023 Tax Year

At a glance

• The main takeaway: Companies who don’t generate taxable income can potentially gain a greater immediate R&D credit benefit for the 2023 tax year. 
• The benefit for your business: If your startup uses the R&D tax credit to reduce payroll taxes – or if you’re considering using it to do so – you may be able to keep more money in your company’s pocket.
• Next steps: Schedule a consultation with Aprio’s R&D Tax Credit specialists for assistance in achieving the full R&D credit benefit available for your small business.

The full story

Small businesses and startups filing R&D tax credits for the 2023 tax year can potentially gain a greater immediate benefit due to legislation passed in 2022. 

In August of 2022, Congress increased the cap for the Federal Withholding benefit as part of the inflation reduction act (IRA) of 2022. Businesses who qualify can now apply up to $500,000 per year against payroll tax liability for tax years beginning after December 31, 2022. Prior to this legislation, the amount of tax liability companies could apply against their payroll tax benefits was limited to $250,000 per year.

This increased amount can benefit small businesses as well as traditional startup companies, who often don’t generate taxable income for several years. Previously, the $250,000 cap led small businesses with little to no income tax liability to generate unused R&D Tax Credits that were carried forward to future taxable years. Now small businesses and startups with considerable R&D spend from the 2023 tax year can use the benefit to offset a larger portion of payroll costs.

Does your business qualify for this benefit?

Companies that qualify as a Qualified Small Business (“QSB”) are eligible for this benefit. Companies must meet the following criteria to be considered a QSB:

• Generate less than $5 million in gross receipts for the current tax year; and
• Have generated gross income for less than 5 years, including the current tax year.

What could this mean for your business?

Eligible businesses that meet the criteria can apply up to $500,000 per year against payroll withholding, split between Social Security and Medicare taxes.

QSBs can reduce their share of Social Security taxes up to $250,000 per quarter until the maximum yearly cap of $500,000 has been met. The remaining credit up to the $500,000 cap can be used to reduce the employer’s share of Medicare taxes. After reducing Social Security and Medicare taxes, any remaining amount can be carried forward to the next quarter.

Next Steps

Aprio’s team of advisors can provide the expertise needed to offset the R&D costs associated with starting up a small business. Companies can claim R&D credits for activities related to improved processes or products in a wide range of industries including technology, manufacturing, and aerospace. 

Schedule a consultation with Aprio’s team of R&D Tax Credit advisors to learn how this legislation could benefit your credit.

Related Resources/Assets/Aprio.com articles/pages

• Final Form 6765 is Available for 2024 Federal R&D Credits
• Will Claiming the R&D Credit Result in an Audit?
• It’s Official: Software Development Included in Tax Definition of R&D – Aprio