Payroll Tax Offset from the R&D Tax Credit – Eligibility and Common Pitfalls
December 05, 2018
By Tim Rankins
The relatively recent enactment of the payroll tax offset for qualified small businesses has offered a major benefit for taxpayers. However, taxpayers must meet very specific criteria to be eligible for the benefit.
A qualified small business can use their research tax credit claimed on Form 6765 to offset 50% of their social security tax (lines 5a & 5b) from their 941 filings. The amount claimed cannot exceed $250,000 per year.
A qualified small business is a corporation, partnership or S corporation that has:
- Less than $5 million in gross receipts in the current tax filing;
- No gross receipts (as in 0), prior to a five-tax-year window that includes the tax filing year
- Example – For current 2017 tax filings, there can be no gross receipts prior to 2013 (five-year window = 2013, 2014, 2015, 2016 and 2017).
Many small businesses initially think they’re eligible, but upon closer examination find out they are either not eligible at all or their qualified research expenses are much less than originally anticipated. Below are the common traps our tax professionals have discovered:
- Gross receipts mean everything. So if the taxpayer had a bank account paying interest in 2012, they would not be eligible on their 2017 tax filing because of their de minimis amount of interest receipts in 2012.
- Short tax years matter! Companies with multiple tax years must include each in the count of that five-year window.
- Beware of the control group rules. The research tax credit is calculated on a control group basis (50% or more ownership). Therefore related brother/sister companies may disqualify a taxpayer when you aggregate gross receipts on a control group basis.
- Carrying on a trade or business – Many qualified small businesses may be pre-revenue companies that don’t meet the “carrying on a trade or business” requirement under IRC Sec. 41. Therefore, contract research expenses would be ineligible.
- Check the Box! The taxpayer must check the box on Section D of the form 6765 on its timely filed (including extensions) tax return. You cannot amend and check this box. Therefore it’s imperative to ensure the form is done properly at the time of filing.
The best answer is to consult your local tax professional to determine eligibility and potential benefits.