Recently, the IRS issued Notice 2017-23, which provides guidance on the R&D payroll tax provision enacted in the Protecting Americans from Tax Hikes (PATH) Act passed in December 2015. For tax years beginning after December 31, 2015, taxpayers that have less than $5 million in gross receipts for the current tax year and no gross receipts for any tax years preceding the five tax year period ending with the current tax year can apply their R&D credits to offset up to $250,000 in payroll tax liability.
This option benefits true startup companies that may not have a lot of federal income tax liability. While the payroll tax credit typically must be elected, the IRS is allowing 2016 tax returns to be amended to claim the credit if they have not been done previously. However, these tax returns must be amended before December 31, 2017. This will enable taxpayers who were not aware of the payroll tax provision to take advantage of it.
To illustrate the value of this notice, McGuire Sponsel would like to discuss a biotechnology client that received a substantial benefit. The company began in 2015 but did not have any revenue in 2015 or 2016. With $170,000 in qualified research expenses in 2016, the company was able to claim an effective tax credit of $11,000 that could be split between federal credits and payroll credits. Prior to Notice 2017-23 being released, this company would not have been eligible for the 2016 payroll tax credit because its 2016 return had already been filed prior to claiming the R&D credit.
Don’t hesitate to contact McGuire Sponsel if you have any questions related to the R&D Tax Credit.