A new tax credit introduced by the federal government to encourage more research and development will make it possible for some small businesses to reduce their tax liabilities under the Federal Insurance Contributions Act (FICA). Eligible companies will be able to claim up to $250,000 in R&D expenses as a credit against FICA taxes.
Business owners and executives who believe their companies might benefit are advised to start looking into it right away. Companies have been able to claim the credit from the start of the year, but they are only allowed to do so beginning at the start of the quarter following the date they filed their tax returns. So if a company files its tax return in late March, for example, they could begin claiming the credit in April.
There are two ways to apply the tax credit, one that offsets the alternative minimum tax and another taken as a credit against FICA taxes. Under the AMT option, eligible small businesses include corporations with stock not publicly traded, partnerships, and sole proprietorships. Average gross earnings cannot exceed $50 million.
It is expected that most companies claiming tax credit will do so under the second option. Qualifying businesses are corporations (including S corporations) and partnerships with gross revenues of less than $5 million. Any organization qualifying as tax-exempt under section 501 does not qualify for the tax credit.
In order to qualify for the tax credit, money spent on research and develop must go to certain kinds of research. The IRS defines qualifying research as that which can be classified as section 174 expenses. Research must be technical in nature and must be intended to improve the business of the taxpayer in some way, shape, or form. The following kinds of research are not eligible for the credit:
• Research began after commercial release of an affected product or service
• Research meant to adapt an existing product or service to the needs of a particular customer
• Research intended to duplicate an existing product or service
• Research presented as surveys or studies
• Research devoted to certain software products used in-house
• Research conducted outside the U.S., Puerto Rico, and U.S. possessions
• Research funded by outside entities, including government entities
• Social sciences, humanities, and arts research
Being able to claim the tax credit will definitely have an impact on payroll taxes. But as with any tax credit, claiming it has to be done within the parameters of the law. Compliance is always the top priority.
Another Reason for Outsourced Payroll
As a national leader in outsourced payroll services, BenefitMall is pleased by the government's efforts to encourage research and development by offering a tax credit against the employer share of FICA taxes. We also understand that the rules surrounding the tax credit can be complicated and sometimes ambiguous. Any plans to claim the tax credit is yet another reason to outsource your payroll.
We make it our business to know and understand everything related to payroll taxes. Our staff of accountants continually studies new rules as they come into effect; they work hard to understand how those rules apply to every client we serve. They do all the heavy lifting so that small businesses and their managers do not have to.
If your company is eligible to take advantage of the new tax credit for R&D, we encourage you to learn more about it. You can save quite a bit of money in payroll taxes, investing that money in things that could improve your long-term profitability.