If you’re a start-up company with annual gross receipts of less than $5 million, you can now apply up to $250,000 of your R&D credit against your payroll tax liability.

The federal R&D tax credit is a dollar-for-dollar reduction of federal income tax liability for qualified expenditures incident to the development or improvement of a product, process, software, formula or invention. It was recently made permanent by The “PATH” Act.

Previously, a company had to actually generate a profit and taxable income to utilize the R&D tax credit. Now the PATH Act allows start-up companies to utilize the credit against their payroll taxes, if the companies perform “qualified research”.

What if your company is a start-up without taxable income and the resulting tax liabilities? The company may not be able to utilize the R&D tax credit in the current year, but can carry credits forward 20 years to utilize when it has taxable income. If your company would like to monetize this credit before then, starting in 2016, you can take advantage of the recently-enacted PATH Act’s new payroll tax offset.

Federal Payroll Tax Offset

The new payroll tax offset election allows qualified small businesses to elect to use a portion of their R&D tax credit now to offset payroll taxes instead of waiting to use the credit against future income tax liabilities. In tax years beginning after December 31, 2015, companies with less than $5 million in gross receipts and less than five years old have the option to apply up to $250,000 per year to offset payroll taxes.

For example, an early-stage information technology-based company has approximately $1,500,000 in annual payroll expenses, of which $1,000,000 consists of wages paid for software development. If the company meets the definition of a qualified small business, it should qualify for approximately $45,000-$100,000 in federal R&D tax credits. Assuming the company has no tax liabilities to offset, it can apply the R&D credits against its OASDI tax ($93,000), generating immediate cash recoveries.

Who Qualifies

This credit remains one of the most challenging provisions of the tax code. TRCG Advisors’ qualified professionals can assist businesses with qualifying for and claiming the credit. Contact us to take advantage of this opportunity.