How to calculate the new Payroll Tax Offset for an R&D Tax Claim

calculator-925385_960_720“It’s not about ideas. It’s about making ideas happen.” Indeed, as the words of entrepreneur Scott Belsky reveal, idea creation is only half the battle for start-ups. Putting ideas into action and funding is often where the true hurdles lie. Now, however, changes to the R&D Tax Credit have made it easier for fledgling companies to generate tax savings.

The Protecting Americans from Tax Hikes (“PATH”) Act of 2015 saw the R&D Tax Credit become permanent and included a number of other legislation changes. Most notably, the changes mean there is a good chance that start-ups will now qualify for the credit.

Nonetheless, there remains a lot of uncertainty surrounding the new procedures for the R&D tax credit, in particular, the new Payroll Tax Offset.

Previously, a company had to actually generate a profit to claim the R&D Tax Credit. However, the new R&D tax credit now allows qualified small businesses to choose to use a portion of their R&D tax credit now to offset payroll taxes, rather than waiting to use the credit. This is fundamentally what the Payroll Tax Offset is.

Overall, the Payroll Tax Offset:

  • Allows a payroll tax offset for start-up businesses (under $5 million in gross receipts).
  • These companies can take a credit against FICA taxes only–other payroll taxes are excluded.
  • Maximum credit is capped at up to $250,000 per year for five years.
  • Effective for 1/1/2016, but not available for 2015 or earlier periods.

Hence, the new legislation permits start-ups to claim the credit against their payroll taxes, presuming that the employees are engaged in research and development. However, to elucidate the above, these companies can take a credit against the employer’s portion of FICA taxes (6.2%) – but FICA taxes only. Thus, an example of how this works and would be calculated is described below:

Your start-up company hires three people and they exclusively work 100% on qualifying R&D activities. Each one earns $70, 000 a year. Thus, with the Payroll Tax Offset the start-up would save a total of $13,020 – aka, 6.2% of their collective salaries. It is important to note that the R&D tax credit would only offset half of that amount if they only spent half their time on R&D.

Keep in mind that what constitutes as research and development activities is broad and also encompasses a diverse range of industries. Subsequently, it is imperative that business owners involve the assistance of professionals to decide not only the businesses’ eligibility for R&D Tax Credit but also which R&D activities qualify. Texas Tax Credit can provide with the advice you need, contact us today to find out more about the credit.