IRS Releases Draft Forms to Help Companies Monetize R&D Credits

After Congress re-vamped the R&D Tax Credit last year, questions remained as to how the IRS would implement the new payroll withholding aspect. The IRS has finally released three draft forms that will help companies claim this valuable tax incentive!

In December 2015, Congress made the Research & Development (R&D) Tax Credit permanent for the first time since 1981. They also re-vamped the credit, allowing certain qualifying startup companies to use their federal R&D Credit to offset a portion of federal payroll tax withholding. Questions remained as to how the IRS would implement the new payroll withholding aspect of the credit. Finally, the IRS has released three draft forms that will help companies claim this valuable tax incentive!

WHAT CHANGED FOR “SMALL BUSINESSES”?

Prior to this law change, early stage companies did not get any current benefit for the federal R&D Credit. Late last year, the government created a law that truly gives early stage companies an added boost. Now the federal R&D Credit has value, especially to a young company.

The payroll withholding provision became effective Jan. 1, 2016. In order qualify for this new incentive, your company: a) must have less than $5 million in revenue for the year and b) must have revenue for five years or less. If you qualify you can convert $250,000 of your federal R&D Credit into cash by offsetting certain payroll taxes each pay period. There is also a limitation on using this incentive for five years. No revenue needed, no profit needed, just employees.

The IRS just released draft forms which show how to collect your federal R&D Tax Credits from the government.

WHAT DO THE DRAFT FORMS MEAN FOR YOUR COMPANY?

  • Form 6765: Form 6765 allows companies to claim the “credit for increasing research activities.”
    • There is a new section with a line for eligible small businesses.
    • The IRS added an entirely new section, “Qualified Small Business Payroll Tax Election and Payroll Tax Credit,” which provides a mechanism for companies to elect to use their R&D Credit to offset certain federal payroll withholding taxes.
  • Form 8974: Taxpayers will file this new form in conjunction with IRS Form 941.
    • This form will assist you in keeping track of how much R&D Tax Credit you use each quarter to offset payroll withholding.
  • Form 941: This form has been modified to allow you to subtract from your payroll taxes due the R&D Credit, as computed on IRS Form 8974.
  • Form 3800: The IRS also updated the General Business Credit Form to accommodate the changes to the R&D Tax Credit.

If you perform R&D in Georgia, you can now double dip. Our firm has been helping companies performing R&D in Georgia offset their Georgia withholding tax with the Georgia R&D Credit since 2008.

WHAT ACTION SHOULD YOU TAKE?

These changes open the door to substantial tax savings for new companies. We have requested guidance from the IRS to confirm if this incentive is available to companies that utilize PEOs. HA&W’s R&D Tax Credit team can help you determine whether your business qualifies to use the federal R&D Credit against payroll withholding, and we offer integrated Payroll Services that help companies seamlessly take advantage of this new incentive. Contact Carli McDonald at 770-353-2772 or carli.mcdonald@aprio.com to get started!

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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