In 2017, a new tax credit arrived, and it was a big one: businesses who qualify can claim up to $250,000 per fiscal year. That’s a lot of money! So how can you get your hands on this sparkly new credit? We’ll walk you through it. Read on to learn the basics about the new federal R&D tax credit – from what it is to how to claim it.
What is this new credit?
The Federal R&D Tax Credit is a tax credit for small businesses to help offset their costs for research and development. Beginning in 2017, qualified small businesses may claim up to $250,000 per fiscal year, applying it against their Social Security taxes.
Am I eligible?
In order to qualify for the 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
Companies in industries like technology and science are most likely to use this new credit. However, businesses in any industry may qualify if they are actively developing new products or processes.
Cool, so how do I get the credit?
The first step is to conduct an audit of your business’s R&D expenses. Be sure to work with your accountant on this. They’ll be able to determine if you qualify and what research and development costs can be applied.
With the audit complete, your accountant will file Form 6765, Credit for Increasing Research Activities with your business’s annual Income Tax Return.
It’s important to note that the credit you claim this fiscal year is based on your R&D costs for last fiscal year. So if you want to claim the credit to reduce your employer social security taxes now, you needed to conduct the audit on your previous fiscal year’s R&D expenses and file Form 6765 with your income tax returns this year.
But then how do I get the money back?
The answer is payroll! Like many tax credits, 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 this year the IRS changed the rules to 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. In order to claim the credit, it must be included on your quarterly Form 941 filing with a completed Form 8974 attached. 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.
So how does this work with my payroll provider?
This is a new credit, so many payroll companies are still figuring out if they can support it and how. If you would like to claim this credit, talk to your payroll provider as soon as possible to see if they support it.
Does Gusto support the Federal R&D tax credit?
Yes! Gusto will complete and file Forms 941 and 8974 for customers so they can claim the credit with their payroll filings. Learn how to set it all up here.
And there you have it! Your most pressing R&D credit questions, answered. For more info, please consult your tax advisor and check with the IRS.