Since 2017, small businesses with eligible expenses can claim a research and development tax credit of up to $250,000. This Federal R&D Tax Credit helps small businesses offset their costs for research and development.
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The tax credit is applied against the employer’s share of Social Security tax liabilities and is reported on your quarterly Form 941.
Is my business eligible for the R&D tax credit?
In order to qualify for the research and development credit, your business generally needs to tick all three boxes below. Your business must:
- Have less than $5 million of gross receipts
- Have gross receipts for five years or less
- Have qualified research and development costs
Businesses in any industry qualify for the credit if they’re actively developing new products or processes.
How do I get the tax credit?
- Complete Form 6765, Credit for Increasing Research Activities.
- Once this is on file with the IRS and they have approved your credit, file Form 8974, Qualified Small Business Payroll Tax Credit for Increasing Research Activities.
- Form 8974 is attached to your 941 when you file it.
Want to get the R&D tax credit but not deal with the paperwork? Payroll providers like Gusto will complete and file Forms 941 and 8974 for you.
Important note: the credit you claim for any fiscal year is based on your R&D costs for the previous fiscal year.
How do I get money back?
The answer is payroll! You can apply the Federal R&D Tax Credit to your business’s income taxes, but many small businesses don’t have enough income tax liability to use up the credit.
So in 2018, the IRS changed the rules to also allow businesses to apply the credit against their Social Security taxes.
After filing Form 6765 with the IRS, you can begin claiming the credit with your next quarterly payroll tax filing. The IRS will then issue you a refund for the social security taxes you have paid in that quarter (which the IRS estimates will take 6-8 weeks).
Does unused credit expire?
No. You can continue to apply any remaining credit each quarter until the credit is fully claimed, and you can even carry unused credit forward to the next fiscal year.
And there you have it! Your most pressing R&D tax credit questions, answered. For more info, please consult your CPA or tax advisor.