While the Research and Experimentation (R&D) Tax Credit can apply to companies of all sizes, 2016 is the first year that certain companies can elect to apply the credit toward their payroll expenses. This is a big deal for startups, as the payroll offset was put in place to benefit companies that are not profitable and can’t use the credit to lower their income taxes.
How do I know if my startup is eligible for R&D credits?
The payroll offset only applies to companies that:
- Are actively engaging in R&D activities (more about qualifying activities in this guide)
- Have less than $5 Million in gross receipts for 2016
- Did not have any revenue prior to 2012
There’s a couple layers of this credit that make it time-sensitive. While there’s still time to file 2016 tax returns (or even amend already filed returns), startups will need to get their ducks in a row in order to make their claim.
Startups Still Have Time to Determine 2016 R&D Eligibility and Apply Credits Toward Payroll Taxes
If a company plans to use 2016 R&D tax credits to reduce their payroll expenses, they only have until:
1. They file their tax returns on time (assuming some organizations filed an extension, which means they have until September 17, 2017 or October 15, 2017).
2. If they have filed already, they have until December 31, 2017 to amend their return.
But after that, the window for the 2016 tax return is gone for good!
What are the steps to claim your R&D credits toward FICA payroll taxes?
- Determine your eligibility and which expenses qualify for the R&D credit. You may want to consider working with a specialty provider.
- Once you know your expenses, share these with your accountant to include on your company’s tax return.
- Provide Form 6765 (from your tax return) and Form 8974 (the new “connecting form”) to your payroll provider to be applied on your Quarterly 941s.
- Your offset or reduction will begin the quarter after filing and roll forward each quarter until exhausted.
Obviously, since the original announcement, more and more startups are taking the steps to determine their eligible research and development activities and calculate their tax-savings while they can. If you haven’t already begun the process of determining your eligibility for the R&D tax credit, consult The Business Owner's Manual to the R&D Tax Credit.