When does the new election apply?
Starting with tax years beginning in calendar year 2016, if you are a qualified small business, subject to limits, you can elect to apply all or some of any research tax credits that you earn against your payroll taxes instead of your income tax. If you are engaged in, or are planning to engage in, research activities without regard to income tax consequences, let the below discussion simply serve as good news that some Immediate cash benefit could be in your future.
What is the benefit?
The payroll tax offset election is an opportunity to get immediate use out of the research credits that you earn. Because, every dollar of credit-eligible expenditure can result in as much as a 10-cent tax credit, that's a big help in the start-up phase of a business—the time when help is most needed.
Who is eligible?
To qualify for the election a taxpayer (1) must have gross receipts for the election year of less than $5 million and (2) be no more than five years past the period for which it had no receipts (the start-up period). In making these determinations, the only gross receipts that an individual taxpayer takes into account are from the individual's businesses. An individual's salary, investment income or other income aren't taken into account. Note also that neither an entity nor individual can make the election for more than five years.
What are the limits on the election?
Research credits for which the taxpayer makes the payroll tax election can be applied only against the employer's “social security” portion of FICA taxes (i.e., the employer’s 6.2%). The amount of research credit for which the election can be made is limited to $250,000 annually. Any credits that you carryforward into the 2016 tax year cannot be used for the payroll tax election. In addition, you cannot carryback any credits to years prior to 2016 for use as a payroll tax offset.
How do you apply for this election?
Election is made on page 2 of Form 6765 in Section D. A new payroll form (Form 8974) is used to determine the amount of the quarterly credit that you can claim on Form 941, and is required to be attached to the Form 941 for each quarter the credit is claimed. Form 941 has a new line where you input the research credit amount directly from the Form 8974.
If you have questions regarding the payroll tax offset election, please feel free to contact an Armanino tax professional.