R&D Tax Credit for Startups

By Carli McDonald, partner-in-charge of R&D Tax Credit Services of Aprio.

Every startup wants to save money and as unsexy as taxes can be, they can be a great way to save. The good news is that as a part of the PATH act, Congress not only made the R&D Tax Credit permanent but also greatly enhanced the credit. Read: it saves startups money! So if you have less than $5,000,000 in revenue in the current tax year and five or fewer years of revenue in total, this post is for you.  So make sure to ask your accountant for the details. Filing yourself? Here’s the small print: 

  • If you file quarterly employment tax returns, the business should claim the payroll tax credit election for the first quarter after the return was filed. For example, if the business files an income tax return including the payroll tax credit election on Apr. 10, 2017, the business should claim the payroll tax credit for the third quarter of 2017. Businesses should continue to make payroll tax payments to the IRS as they do today. The credit will be reflected as an adjustment to the return beginning in the following quarter, resulting in a refund.
  • If a qualifying business files annual employment tax returns, it should claim the payroll tax credit on the annual employment tax return beginning in the first quarter following the payroll tax credit election.
  • If the qualifying business files its return for a tax year beginning after Dec. 31, 2015, but fails to make the payroll tax credit election, it may make the election on an amended return filed on or before Dec. 31, 2017.
  • The taxpayer must use the same Employment Identification Number (“EIN”) on all forms requiring the election of the payroll tax credit.
  • The payroll tax credit claimed on an employment tax return cannot exceed the employer’s portion of the social security tax for any calendar quarter. It may, however, be carried forward to the following calendar year, subject to the social security tax limitation applicable to the quarter(s).
  • Professional employer organizations (“PEOs”) must be Certified PEOs (CPEOs) in order for their clients to use the R&D Credit against federal payroll withholding.

Bottom line? The ability to apply for the R&D Tax Credit against payroll withholding could save your startup millions of dollars. Startup tax credit is always a good thing.