What Is the R&D Payroll Credit?
The R&D payroll credit was first offered by the IRS as a means of incentivizing businesses to funnel more money into research, development and innovation. Specifically, this nonrefundable tax credit makes it possible for some businesses to reduce their tax liability dollar-for-dollar. Likewise, this credit offers approximately 13 cents on the dollar in credits for every dollar spent on eligible research and development initiatives.
More information on the R&D payroll credit (which is also referred to as the Research and Experimentation credit) is available in IRS Section 41 for reference.
It is also worth noting that changes have been made to the R&D credit in recent years, so businesses that may not have previously qualified for the credit or those that claimed the maximum credit in previous years may now be eligible—and for a potentially higher amount. That’s because the maximum credit was increased from $250,000 to $500,000 beginning in 2023 as part of the Inflation Reduction Act of 2022.
How to Determine Eligibility
There are strict eligibility requirements in place for businesses looking to claim the R&D payroll credit, so it’s important for business owners to understand these requirements before attempting to claim any amount.
First, businesses looking to claim the R&D payroll credit need to operate within the United States and must have proof of money spent on research, development and experimentation activities that are related to the business. For example, a business may claim the credit to offset costs related to paying research specialists or even ordering testing supplies.
For business owners who aren’t sure whether their expenses qualify for the R&D credit, there is actually a four-part test that can be used to determine this. Specifically, qualifying expenses must meet all of the following criteria:
- Be covered as expenditures under IRC Section 174.
- Be used to discover information that is “technological in nature.”
- Be applicable to the development of a new or existing business concept.
- Utilize experimentation that eliminates uncertainty in design, method or capability.
In addition to the above requirements, small businesses looking to claim the R&D payroll credit need to be within the first five years of operation. Eligibility must also be determined every year, so it’s important for business owners to revisit eligibility criteria before claiming to avoid mistakes (even if the business was able to claim the credit successfully in the past).
Claiming the R&D Payroll Credit
For companies that qualify for the R&D tax credit, IRS Form 6765 can be used to determine the total amount of the credit to be claimed. This form should be completed as accurately as possible before being submitted along with other business-related tax return documents by the filing deadline for the given tax year.
Once the form is filed with the company’s tax return, that business can begin applying the credit to applicable payroll taxes (such as Social Security and Medicare). It is also worth noting that businesses can roll over unused credit amounts each quarter until the total credit amount has been utilized.
Questions? Consult with an Expert
While the increase in the R&D payroll credit can be extremely beneficial to companies that have been setting aside money for experimentation and research, the reality is that the eligibility rules surrounding this credit can be confusing to some. With this in mind, it’s never a bad idea to consult with a business tax expert to determine eligibility before the tax season rolls around. From there, business owners can claim any and all credits for which they are eligible and file their taxes with a greater sense of confidence.
Contact Frankel to learn more about how we can support you and your business at www.frankel.cpa or call us at (402) 469-9100.
