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Research and development is an important part of starting and growing a successful business.
Recently, the Internal Revenue Service (IRS) announced that qualified small business startups are able to apply a portion of the business research credit toward either a payroll tax credit or toward the employer’s portion of employees’ social security taxes, instead of applying it against their income tax liability.
IRS officials said it made this rule to benefit small businesses that may have very little to no income tax liability, and allow them to benefit from applying the credit to other areas of their taxes. Government officials hope this will help small businesses grow profitable more quickly, as well as boost job creation.
The IRS defines research and development costs as “all expenditures incident to the development or improvement of a product.” It does not include marketing, surveys, management studies or some other costs. Details about how the IRS defines research and development costs are available on the IRS website.
Which types of small business startups qualify?
According to the IRS website, any corporation or partnership whose gross receipts for the taxable year are less than $5,000,000, and which has not had gross receipts dating back further than five years, qualifies for this special tax application.
If this applies to your business, you can choose to apply up to $250,000 of your research credit toward your business’s payroll tax credit, or social security contributions for employees.
How does my business claim this credit?
Once you have determined your business meets the criteria, you must fill out IRS form 6765 for Increasing Research Activities, and attach it to your on-time tax return.
To apply the credit toward your business’s payroll taxes, you then fill out form 8974 and attach it to the Employer’s Quarterly Federal Tax Return, which is usually Form 941.
Late tax returns that have been approved for a filing extension can also still qualify.
What if I qualified this year, but already filed my return without it?
If you are just now realizing that your business qualified under the Increased Research Activity, but you already filed your returns without exercising it, you can still file an amended return. Re-do your tax return and add form 6765 before Dec. 31, 2017, and you can still take advantage of the new tax application.
You can consult this section of the IRS website for guidance on questions about whether your business qualifies, how to determine your gross receipts, what choices you have for applying for your tax credits, and much more.
You can also contact us at Wendroff & Associates, and we are happy to help you and your business navigate the trickiest of tax questions. Contact us anytime at 703-553-1099.