Acceleration in the work schedule for certain start-up businesses
Practice note: New for 2016 – Election to apply research credit against payroll tax
“In addition to 2017 “Tax Season” changes in due dates for Forms 1065 and 1120, practitioners may want to re-visit the work schedule for start-up taxpayers desiring to utilize the R&D credit to offset payroll taxes.
The credit on Form 941 is only available for the quarter AFTER the filing of the return claiming the R&D credit. Therefore, a calendar year C corporation tax return, which was due in 2016 on March 15, has for 2017 been pushed back to a filing due date of April 15, 2017.
If the client and practitioner can have the Form 1120 filed by March 31, 2017, the R&D credit is available to offset the Second Quarter 2017 Form 941 taxes. If the return is filed April 1 through June 30, 2017, the new provision is not available until the Third Quarter 2017 Form 941.
If the return is filed in the time frame July 1 through the extended due date of September 15, the credit is not available until the Fourth Quarter 2017 Form 941. “
Included within the PATH extension of the research (R&D) tax credit are two modifications. Beginning in 2016, eligible small businesses ($50 million or less in gross receipts) may claim the credit against alternative minimum tax (AMT) liability. For newer and smaller businesses (see requirements below) the credit can be utilized against the employer’s share of payroll tax (i.e., FICA) liability.
Partnerships or S corporations will elect to apply the credit at the entity level.
Taxpayers eligible to apply 2016 R&D credit toward 2017 payroll taxes
Eligible small businesses must meet the following requirements:
- Gross receipts for the tax year (in which the credit is generated) of less than $5 million,1 (for an individual, aggregate gross receipts received in carrying on all trades or businesses);
- No gross receipts for any tax years preceding the five-tax-year period ending with the tax year;
- Is not an organization which is exempt from taxation under §501.
Practice note: Payroll tax benefit is designed for start-up trades or businesses
A taxpayer making this election for 2016 may have gross receipts in 2012, 2013, 2014, and 2015. Taxpayers with gross receipts prior to 2012 are no longer eligible for the election.
Example:
Daniel Inc. commenced operations in 2013. For 2016, Daniel Inc. has gross receipts of less than $5 million, and has Research Credit calculated on Form 6765.
Daniel may elect with filing of the 2016 tax return to offset OAISD liability beginning with its 2017 Form 941, Quarterly Report.
Daniel Inc. qualifies for the payment offset election only for 2016 and 2017. In 2018, Daniel Inc. will not qualify as it will have gross receipts preceding the fiveyear period ending with the tax year.
Once the election is made it may not be revoked without IRS consent.
New Form 8974
To facilitate the new provision, IRS released Form 8974, Qualified Small Business Payroll Tax Credit for Increasing Research Activities. Taxpayer will attach this form to its quarterly Form 941 and may offset the employer portion (i.e., 50 percent of Social Security tax as calculated) up to a maximum of $250,000. The $250,000 amount must be allocated among the members of a controlled group. In the case of an entity other than a partnership or S Corporation, the election amount is also limited to the amount of the business credit carryforward under §39 from the tax year (determined before the application of this section to the tax year).
Revised Form 941
Form 941 is also in revision to add new Line 11, to accept the credit as calculated on Form 8974, Qualified Small Business Payroll Tax Credit for Increasing Research Activities. The credit is available for the first calendar quarter beginning after the date on which the business tax return is filed.
Practice note: Credit does not apply to Medicare or amounts withheld
Practitioners will note within the syntax of the two forms, the credit amount is derived by taking 50 percent of the employer’s total Social Security on wages or tips (Column B, Lines 5a and 5b).
The election to apply the credit is only applicable to the employer’s OASDI (Old Age, Survivors, and Disability Insurance program) amount.