Start-ups and small businesses that were previously unable to benefit from the R&D tax credits due to lack of taxability should take advantage of the payroll tax liability offset. Internal Revenue Code (IRC) Section 41(h) allows start-ups and small businesses to use the tax credit up to $250,000 to offset against payroll tax liabilities.
Qualified Small Businesses (“QSB”) may elect to use R&D credits to offset up to $250,000 of payroll tax liability. A QSB is a corporation, partnership, or individual with less than $5 million of gross receipts during the taxable year AND did not have gross receipts for any tax year before the fifth tax year ending with the year of the claim. The payroll benefit can be claimed in the first quarter subsequent to filing the prior year income tax return.
The payroll-tax offset is available to eligible new businesses and start-up companies for up to five years. Any unused R&D credits that aren’t elected to offset payroll taxes may be carried forward for up to 20 years and used when the business becomes profitable.
Businesses with research and development activities should consult with their tax advisor if they can benefit from the credit.