The Protecting Americans from Tax Hikes Act of 2015 ("PATH Act") significantly enhanced the Research and Development Tax Credit Program (“RTCP”) on a myriad of levels by making the RTCP a permanent tax incentive within the Code and considerably restructured the program to:
• Allow eligible “Small Businesses” (i.e., $50 million or less in gross receipts) to claim the RTC against the Alternative Minimum Tax ("AMT") for tax years beginning on or after January 1, 2016; and
• Allow eligible “Start-Up Companies” (i.e., those with less than $5 million in gross receipts and earning revenue for less than 5 years) to claim up to $250,000 of the RTC against the company’s Federal Payroll Tax for tax years beginning on or after January 1, 2016.
Since the inception of the enhanced RTCP for eligible start-up companies there have been many inquiries regarding the actual scope and application of the RTCP including how and when the Internal Revenue Service (the “Service”) will issue these refunds. Thankfully the suspense is finally over. For calendar year-end start-ups that timely filed their tax returns by March 31, 2017, their refund checks were issued and received throughout the month of August based upon second quarter withholding filings recently completed this past July.
Scope and Application of the RTCP for Start-Up Companies
More specifically, start-up companies with less than $ 5 million in gross receipts in the current taxable year (and that have no gross receipts for any taxable year prior to the five taxable year period ending with the current taxable year) can offset the employer portion of Old-Age, Survivors, and Disability Insurance (hereinafter “OASDI”) by up to $250,000 for each year.
Eligible Start-Up Company Best Practice Guidelines
√ If gross receipts are less than $5 million in 2016, then the business must have no gross receipts before 2012;
√ Taxpayers must make an annual election specifying the amount of its RTC (i.e., not to exceed $250,000) used as a payroll tax credit, on or before the due date of its originally filed tax return, including extensions. After making the election, businesses may begin to offset the employer portion of OASDI in the following calendar quarter. As a caveat, it should be duly noted that revoking the election requires permission from the Secretary of the Treasury; and
√ Social Security tax amounts up to 6.2% of an employee’s social security taxable wages for the calendar year (e.g., the 2016 social security taxable wage limit is $118,500).
Mandatory 3-Step Tax Compliance Reporting Requirements to Properly Offset Payroll Tax with the RTC
1) File Form 6765 entitled “Credit for Increasing Research Activities” and ensure to make an annual election to specify the amount of RTCs that will be applied to the employer-portion of Social Security tax. Noting, an annual election to apply RTCs can be made for up to five years;
2) File Form 8974 entitled “Qualified Small Business Payroll Tax Credit for Increasing Research Activities”. This a new form that businesses must utilize to report the amount of RTCs elected on Form 6765 to offset Social Security tax and the form will be filed with Form 941 each quarter that the credit is applied to the Social Security tax liability; and
3) File Form 941 entitled “Employers Federal Quarterly Tax Return” to be able to include the amount reported on Form 8974 each quarter.
About the Author
Peter J. Scalise serves as the Federal Tax Credits & Incentives Practice Leader for Prager Metis CPAs, a member of The Prager Metis International Group. Peter is a highly distinguished BIG 4 Alumni Tax Practice Leader and has approximately twenty-five years of progressive public accounting experience developing, managing and leading multi-million dollar tax advisory practices on a regional, national, and global level.