The Research and Development payroll tax credit, also known as the R&D payroll tax credit is a tax incentive designed for qualified businesses to offset their payroll tax. It is designed for new companies that perform research and technology development activities to be able to apply up to $250,000 of research credit against payroll tax liability.
These R&D credits can be carried forward for up to 20 years.
Which Businesses Qualify for the R&D Payroll Tax Credit?
- Have 5 years or less in revenue
- Have less than $5 million in revenue in the current year
- Have conducted qualifying research activities and expenditures
Documentation Needed to Claim the R&D Payroll Tax Credit
Documentation is extremely important to defending any R&D tax credit claims. This includes having a permitted purpose, technological uncertainty, the process of experimentation, and being technological in nature.
Permitted Purpose: This means the purpose of the research activity was to improve the performance, reliability, functionality, or quality of a product (or software).
Technological Uncertainty: There is uncertainty relating to how the product (or software) should be developed or designed.
Process of Experimentation: There is a trial and error period to attempt to eliminate the above-mentioned uncertainty.
Technological in Nature: The activity must be determined by principles of one or more of the following: Engineering, physical sciences, biological sciences, or computer science.
Our dedicated content compliance professionals at Source Advisors have the industry knowledge and insight to identify qualified technologies and activities that support payroll tax credit R&D claims. Proper documentation is essential to maintaining and protecting the payroll tax credit and our strategy helps substantiate R&D progression, protects company interests, and ensures maximum value.
How Do I Claim the R&D Payroll Tax Credit?
To claim the R&D payroll tax credit, your business will need to be a qualified small business and must elect to apply the research credit against payroll tax liability by completing and submitting Form 6765 to a timely-filed business income tax return.
The IRS provides the below steps for claiming the R&D tax credit on payroll taxes:
Step 1: Complete Form 6765, make the election, and attach the completed form to your timely-filed business income tax return.
Step 2: Claim the payroll tax credit by completing Form 8974. You must attach this form to your payroll tax return, for example, your Form 941, Employer’s Quarterly Federal Tax Return.
When Can You Claim the R&D Tax Credit Against Payroll Taxes?
The R&D payroll tax credit can be claimed on a quarterly basis. This begins after you file your federal income tax return, at the first calendar quarter.
How Source Advisors Can Help with Your R&D Payroll Tax Credit
Companies of all sizes and across multiple industries meet the Federal Government’s test for innovation. At Source Advisors, we will help your company identify and document qualifying activities to claim the payroll tax credits you are due.
Find out if your company qualifies for the R&D payroll tax credit.
R&D Payroll Tax Credit: Frequently Asked Questions
When was the R&D payroll tax credit created?
The R&D payroll tax credit was made available to qualified small businesses in 2016, which enabled these businesses to apply part or all of their research credit against their payroll tax liability (rather than their income tax liability). Prior to 2016, businesses could only take the research credit against their income tax liability.
What is an example of the payroll tax credit?
Let’s say a company has $100,000 in qualified costs for its efforts to create specific technology in its industry. If the company has 5 years or less in revenue, has less than $5 million in revenue in the current year, and has conducted qualified research, it would be eligible for a credit of $10,000. This means it can use $10,000 in tax credit to offset quarterly payroll. This would be done by completing Form 941.
How to record R&D payroll tax credit?
You’ll need to complete Form 6765 in order to record your payroll tax R&D credit. Our team at Source Advisors is available to assist.
When will I be paid by the IRS for my R&D payroll tax credit?
You can expect to receive payment from the R&D tax credit payroll taxes within 6 to 8 weeks after filing.