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It’s common knowledge that Life Science companies spend millions of dollars on research activities but did you know that many of these companies don’t take the R&D tax credit? Why is that? Because, while these innovative companies have large operating expenses they have little, if any, revenue creating net operating loss (NOL) deductions. The federal code allows up to 20 years of NOL carryforwards on future tax returns. Unused R&D tax credits can also be carried forward for up to 20 years so many life science companies pass on the R&D credit rather than earn additional carryforwards.
And Now, for the Good NewsThe PATH Act of 2015 added an additional benefit allowing many life sciences companies to take advantage of the R&D tax credit NOW by using the credit to offset Payroll Taxes by up to $250,000 per year.
Qualified “small” businesses may be able to offset a portion of their payroll taxes using R&D credits. Such businesses interested in saving valuable payroll tax dollars should understand these key points:
- Beginning in 2017, qualifying businesses may offset the 6.2% FICA portion of their payroll taxes using R&D tax credits claimed on their 2016 and future federal returns.
- Qualified small businesses are defined as corporations or partnerships having gross receipts of $5 million or less during the taxable year, and that did not have gross receipts for any year preceding the 5 year period ending with the taxable year. Number of employees or years in business do not factor into the qualification, only receipts.
- R&D tax credits are applied against quarterly payroll tax payments. In any given year, the maximum payroll tax offset allowed is $250,000.
- Payroll tax savings can be realized in 2017, after the corporation’s 2016 federal return has been filed.
- Unused credits can still be carried forward and used against future payroll tax payments.
To demonstrate how the new regulations would apply to a typical Life Science company, have a glimpse of the following example:
A biotech company founded in 2007 was established for the purpose of developing new therapeutic drugs. To date the drug has moved forward into clinical trials but the company is still running at a loss since the drug has not been approved by the FDA yet (thus, no sales).
In 2016, the company continued its drug development incurring $8.5 million in expenses, of which $5 million are qualifying research expenses.
In early 2017, the company has 55 employees and files its 2016 tax year return in March, showing a net loss of $8.5 million and an R&D credit of $485,000. Quarterly payroll tax for the 55 employees will amount to approximately $103,000 per quarter. Using the R&D tax credit, the company will be able to offset $103,000 of the FICA portion of each of its second and third quarter payroll tax payments and $44,000 of its fourth quarter payroll tax payment, for a total of $250,000 in 2017. The remaining balance of $235,000 will then be carried forward to offset payroll tax payments in 2018.
About Intrepid Advisors
Intrepid Advisors is a specialized consulting firm that provides expertise and advisory services to manufacturing and technology companies regarding federal and state R&D tax credits.