Summary: Georgia taxpayers using R&D credits to reduce state payroll taxes now have three years—rather than just 30 days—after filing their tax return to make the necessary election. Companies that don’t generate taxable income can potentially gain greater immediate tax relief by choosing this election.
Applying the Georgia R&D Tax Credit
Companies that qualify for the Georgia R&D tax credit have three options for utilizing the credit. The credit can be used to offset up to 50% of state income tax liability, can be carried forward up to 10 years for credits generated in tax years beginning before January 1, 2025, and up to five years for credits generated in tax years beginning on or after January 1, 2025. In some cases, the credit can be used to offset state payroll withholding obligations, which can be especially beneficial for startups and growing companies with minimal income tax liability and those reinvesting heavily in R&D.
However, to utilize the credit to offset payroll withholding, businesses are required to file Form IT-WH after filing their state tax return. Companies were previously required to file the election within 30 days of filing their Georgia return, but the statutory deadline for making or amending the payroll withholding election was extended beginning with the 2025 tax year. Under current rules, taxpayers may make this election or amend their original election up to three years after the original return due date, including extensions.
Nuances of the Payroll Withholding Election
Eligible taxpayers can save substantially by making the payroll withholding election, but there are a few things you should know.
- Only the credit amount leftover after 50% is applied to income tax may be elected against withholding.
- Form IT-WH must be filed electronically through the Georgia Tax Center.
- The election must be made within the three-year window, or the withholding benefit can be disallowed for that year.
- A Letter of Eligibility that specifies how much credit can be applied against withholding must be issued by the Department of Revenue (DOR). Unfortunately, this is not a guarantee, but working alongside a trusted tax advisor can help make this process seamless.
- Once made, the election is irrevocable for that tax year and can only offset future withholding — so no refunds for past withholding payments.
These eligibility guidelines mean that businesses of different sizes and across diverse industries could potentially benefit from making this election each year. The businesses likely to benefit the most are those with little to no income tax liability, as a greater portion of their credit amount can go towards offsetting payroll withholding once the 50% income tax threshold is met. We suggest seeking the guidance of an R&D specialist to minimize filing risks and maximize potential credit benefits.
You May Also Qualify for Federal Withholding Election
Taxpayers with R&D expenditures typically qualify for the Federal R&D tax credit as well, which can also be applied to income tax liability or against payroll withholding. Additionally, due to legislation passed in 2022, the annual cap of the Federal Withholding benefit doubled from $250,000 to $500,000 in the aggregate. Qualified Small Businesses (QSBs) that often don’t generate taxable income for several years can tremendously benefit from this increased cap, offsetting both social security and Medicare taxes.
Federal Payroll Withholding Election Requirements
However, unlike Georgia, the Federal payroll withholding election is only available to QSBs. To be considered a QSB, businesses must:
- Generate less than $5 million in gross receipts for the current tax year; and
- Have generated gross income for less than five years, including the current tax year.
QSBs can utilize the Federal R&D credit to reduce the employer’s share of social security taxes up to $250,000 per quarter. After the credit is fully applied against social security taxes, the remaining credit can be used to reduce the employer’s share of Medicare taxes for the quarter, up to an additional $250,000. Any leftover amount can be carried forward to the next quarter. The credit is claimed quarterly on Form 941 (via Form 8974) and is subject to the overall $500,000 annual limitation. Any unused amount carries forward to subsequent quarters until the cap is reached, or the credit is exhausted.
Final Thoughts: Take the Next Step
Both the Georgia and Federal R&D tax credits can be extremely beneficial for companies of all sizes, including small businesses and startups that may not yet generate extensive taxable income. With the extended withholding election window in Georgia, companies now have more time than ever to determine whether to apply their credits against payroll withholding obligations.
To learn more about this decision and ensure proper filing, contact an experienced R&D tax advisor.
