New Option for Small Business Startups Claiming Research Credit

BY Justin Koppa

The IRS has issued guidance explaining how a new research credit option can help minimize the tax liability for eligible small businesses that incur qualifying research expenses throughout the year. According to Notice 2017-23, eligible businesses can take advantage of a new option which enables them to apply part or all of their research credit against their payroll tax liability. This is big news for taxpayers who previously could only take the research credit against their income tax liability.

This new option was available for the first time to any eligible small business filing its 2016 federal income tax return this last tax season. The new payroll tax credit is especially attractive to eligible startups that have little or no income tax liability. To qualify, a business must:

  • have gross receipts of less than $5 million and
  • could not have had gross receipts prior to 2012

An eligible small business with qualifying research expenses has the option to apply up to $250,000 of its research credit against its payroll tax liability. This option can be selected by completing Form 6765, Credit for Increasing Research Activities, and attaching it to a timely-filed business income tax return. Don’t worry if you failed to choose this option and still wish to do so. Under a special rule for the 2016 tax year, eligible small businesses can still make the election by filing an amended return by Dec. 31, 2017.

For more information, please contact one of our tax professionals today.