During the National Small Business Week celebration held from April 30 to May 6 the IRS has been highlighting tax benefits and resources designed to help new and existing small businesses. Eligible small business startups can now choose to apply part or all of their research credit against their payroll tax liability, instead of their income tax liability.
According to the IRS, the new option will be available for the first time to any eligible small business when filing its 2016 federal income tax return. Before 2016, the research credit, like most tax credits, could only be taken against the income tax liability. The option to elect for the new payroll tax credit may especially benefit any eligible startup that has little or no income tax liability. To qualify for the new option for the current tax year, a small business must have gross receipts of less than $5 million and must not have had gross receipts prior to 2012. A small business meeting this standard with qualifying research expenses can then choose to apply up to $250,000 of its research credit against its payroll tax liability.
To choose this option, a business must fill out Form 6765, Credit for Increasing Research Activities, and attach it to a timely-filed business income tax return. For eligible small businesses that have already filed and failed to choose this option, there is still time to make the choice. Under a special rule for tax year 2016 they can still do so by filing an amended return. This return must be filed by Dec. 31, 2017.
Further details on how and when to claim the credit are in Notice 2017-23, available on IRS.gov.