Now that 9/15 has concluded, it’s time to start thinking about how the Protecting Americans from Tax Hikes (PATH) Act will affect R&D tax returns for 2016 and beyond. Recently, the IRS released drafts of several forms related to the R&D Credit that provide additional insight regarding the payroll tax credit provision that was enacted by the PATH Act for tax years beginning after 12/31/15. This provision allows eligible start-up companies with less than $5 million in gross receipts to claim up to $250,000 per year of the R&D Credit against the employer portion of the Old Age, Survivors and Disability Insurance (OASDI) part of FICA taxes.
Form 6765 (Credit for Increasing Research Activities) and 941 (Employer’s Quarterly Federal Tax Return) were modified to indicate the allowable payroll tax for that year or quarter. In addition, a draft of Form 8974 (Qualified Small Business Payroll Tax Credit for Increasing Research Activities) was released, which provides the connection between Forms 6765 and 941. Form 8974 provides the calculations necessary to determine the maximum payroll tax credit that can be claimed for that quarter, up to 50 percent of the employer Social Security taxes due. Forthcoming tax form instructions as well as regulations should provide additional information regarding this PATH Act provision.
In addition to the payroll tax provision, another provision of the PATH Act allows eligible small businesses to claim the R&D Tax Credit against alternative minimum tax (AMT). A small business is defined as a private corporation, partnership, or sole proprietorship that have average annual gross receipts of less than $50 million over the previous 3 tax year period.
The new PATH Act provisions will provide new opportunities for companies to claim and utilize the R&D Tax Credit. A discussion should be initiated if your client conducts activities related to new or improved product and process development and was previously unable to utilize the R&D Tax Credit due to tax limitations.