The history of the R&D tax credit, also referred to as the Research Credit, started almost 35 years ago to allow businesses that leverage science and technology in their product or process development to reduce corporate income tax liabilities. But it wasn’t until recently with the passage of the Tax Cuts and Jobs Act (TCJA) in 2017 that this lucrative tax incentive credit became relevant to start-ups and small businesses.
While the qualification of in-house wages, supplies, and outside contractors stayed exactly the same for the core components of the R&D tax credit, the TCJA now allows startups and small businesses to use the R&D Credits to offset employer portion of the payroll taxes (6.2% of wages paid) through quarterly payroll filings. Depending on the methods taken for implementing this refund process, some startups request and receive refunds after paying in their liabilities first while other startups simply pay the liabilities net of the R&D tax credits.
If your business engages in products, process, or technology development, then there is a very good chance your business would qualify for the credit.
As a first step, your business will need to file the correct forms on your timely filed corporate tax return (Form 1120 or 1065).
Once the corporate tax return has been filed, your business can claim back the employer portion of the social security taxes paid. Assuming all the correct steps have been followed, you will then receive a paper check (yes! a nice good-looking paper check) from the IRS after 60-90 days of submitting your Form 941 and Form 8974.
Alternatively, some startups pay in only the actual amount they owe (or net of the R&D tax credits), and file the quarterly Form 941 along with Form 8974 to reconcile and report the liabilities to the IRS on a quarterly basis.
The entire process can be very complicated from calculating the R&D credits to filing the correct forms, and to eventually receive the payroll tax offset. It can involve many hours to: 1) interview with R&D subject matter professionals; 2) deal with CPAs to make sure the forms are correct with the proper elections; and 3) work with your payroll administrator to file the quarterly forms. Further, there could be hours devoted to IRS follow up and tracking your refund.
At Technology Credit, we help with all of the processes above! All you need to do is wait for the check to show up in your mail. Call us now for a free consultation! We will tell you if you qualify, the approximate qualified amount, and your time investment to conduct the activities. Not only will we perform the R&D study using our proprietary automated "Real Study" SaaS platform (an industry first), we will also take care of ALL cumbersome processes outlined above.
The IRS named misuse of R&D credits as one of the largest tax scams in 2018. The IRS has been actively developing tools and protocols to catch R&D tax credit claims that have little to no documentation, or in some cases, are plain fraudulent claims for the purpose of reducing payroll or income taxes.
Documentation is a necessary requirement for businesses, especially for Start Ups, to support the credit. Documentation means supporting detailed evidence that demonstrates the existence and magnitude of the qualified R&D activities. Documentation to substantiate qualified activities include well written tax narratives as well as sufficient real-time contemporaneous documents. Should the R&D credit come under scrutiny by IRS or state tax authorities, documentation is a critical factor in navigating a successful audit. Done on a timely, year by year basis, documentation handled by the right R&D specialist, such as Technology Credit, can go a long way to support a successful claim.
Technology Credit, as our name implies, utilizes innovative technology to calculate and document the R&D tax credit. Our software is fully automated and guaranteed IRS compliant.
Companies in losses can claim the R&D payroll tax credit, as long as you paid or are about to pay social security taxes;
After you file your Form 1120 or 1065, you can start using the R&D credit against payroll tax in the quarter after the quarter to which you filed your Form 1120 or 1065. For example, if you filed your 1120 on or before 3/31/2019 (Q1 of 2019), then you can start enjoy tax credit in Q2 of 2019;
The R&D tax credit payroll offset, can be claimed for 5 years, capped at $250,000 each year or 1.25M for total of 5 year;
Gross Receipts for the year when you claim the tax credit cannot exceed 5 million USD. Should you exceed the limit in Gross Receipts, the R&D credit can still offset corporate income taxes if the company is taxable; and
Any unused R&D tax credits are documented as tax credit carry forwards for future payroll tax offset or corporate income tax offset, depending on the election made.