The PATH Act has a provision that may be beneficial to companies just starting out that do not have any taxable income yet, but are doing research and development (R&D). This provision allows qualified small businesses to take the R&D credit against the employer portion of Social Security payroll tax.
A qualified small business is a corporation or partnership that satisfies these criteria:
- Gross Receipts less than $5 million for the credit year
- No gross receipts for any taxable year preceding the five taxable year period ending with the credit year
A qualified small business makes the payroll tax credit election by completing Form 6765, Credit for Increasing Research Activities. The payroll tax credit election is to be made on or before the due date of the entity’s tax return, including extensions.
Under the provision, you can elect to apply up to $250,000 of the R&D credit against the FICA taxes beginning in the first calendar quarter that begins after the taxpayer files the return. The employer uses Form 8974, Qualified Small Business Payroll Tax Credit for Increasing Research Activities, to apply this limit to the amount of payroll tax credit. Note, you will need information from Form 6765 mentioned above to complete this form. Attach the Form 8974 to your employment tax return. Any unused credit is carried forward to subsequent quarters indefinitely until it is expended. Also, even if the FICA taxes may be completely eliminated through the credit, the taxpayer may still take a payroll tax deduction as if it were paying the taxes in full. The business has the option to apply the entire R&D credit to income tax, payroll tax, or may apportion it between both.
This provision is effected for taxable years beginning after December 31, 2015.