IRS Issues Interim Guidance on the Small Business R&D Credit Related to Payroll Tax – Info on Form 8974

By Carli McDonald, partner-in-charge of R&D Tax Credit Services

As a part of the PATH act, Congress not only made the R&D Tax Credit permanent but also greatly enhanced the credit. This included relief for qualified small businesses (“QSB”), which includes companies with less than $5,000,000 in revenue in the current tax year and five or fewer years of revenue in total. The IRS recently issued interim guidance shedding light on the logistics of this new process.

  • If a QSB files quarterly employment tax returns, the QSB claims the payroll tax credit on its employment tax return for the first quarter that begins after it files the return reflecting the election. For example, if a QSB files an income tax return on Apr. 10, 2017, with a Form 6765 attached reflecting the payroll tax credit election, the QSB would claim the payroll tax credit on its Form 941, Employer’s Quarterly Federal Tax Return, for the third quarter of 2017. Clients have to continue to make payroll tax payments to the IRS like they do today, and the credit will be reflected as an adjustment on their 941 and new Form 8974 beginning in the quarter following the filing of their tax return, resulting in a refund.
  • If a QSB files annual employment tax returns, it claims the payroll tax credit on its annual employment tax return that includes the first quarter beginning after the date on which the business files the return reflecting the election.
  • If a QSB timely files its return for a tax year beginning after Dec. 31, 2015, but fails to make the payroll tax credit election, it may make the election on an amended return filed on or before Dec. 31, 2017.
  • For the purposes of calculating and determining gross receipts, members of a controlled group must be treated as a single taxpayer, which means that the company must take into account all members’ gross receipts to determine QSB eligibility.
  • On Form 8974, the taxpayer must use the EIN that matches the EIN on the 6765.
  • The payroll tax credit claimed by an employer on an employment tax return cannot exceed the employer portion of the social security tax for any calendar quarter. It may, however, be carried forward to the succeeding calendar year, subject to the social security tax limitation applicable to the quarter(s).

    business analysis image Form 8974

    Business team analyze financial numbers to view the performance of the company.

  • PEOs must be Certified PEOs (CPEOs) in order for their clients to use the R&D Credit against federal payroll withholding.

If you’re a qualified small business who plans to take the federal R&D Tax Credit, make sure to review the IRS’ new interim guidance carefully. The ability to apply the R&D Tax Credit against payroll withholding will save many companies millions of dollars. Don’t leave any money on the table!

Questions about the new payroll withholding aspect of the federal R&D Tax Credit or about Form 8974? Contact Carli McDonald at carli.mcdonald@aprio.com or 770-353-2772.

Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.

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