Great article by A&M's Carrie Kingston.
Although current tax reform proposals have left many taxpayers in a state of flux, recent changes to the federal research and development (“R&D”) tax credit provide start-up companies with a unique opportunity for cash savings on payroll taxes. For tax years beginning on or after January 1, 2016, “start-up” companies can use R&D income tax credits to offset up to $250,000 of their payroll tax liability. The window for taking advantage of the payroll tax refunds is quickly approaching for 2016 claims because all claims must be filed before December 31, 2017.
In order to take advantage of the payroll tax credits, start-up taxpayers must meet the following requirements:
1. Gross receipts for five years or less (a company is not eligible if it generated gross receipts prior to 2012)
2. Less than $5 million in gross receipts in 2016 and for each subsequent year the credit is elected
3. Qualifying R&D activities and expenditures that meet the tax definition of R&D, including a wide range of engineering, software development, and other product development initiatives
Generally, many small startups and businesses operate at a loss and are unable to attain a current cash benefit from the federal research credit because the credit could be used only to offset federal income tax liability. With the new payroll tax offset, the R&D tax credit is now available to many small and mid-sized companies that had been effectively barred from using the credit. In 2017, qualified businesses began benefitting from the new payroll tax offset by utilizing 2016 R&D expenditures to offset a portion of their payroll taxes.
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