What is the R&D tax credit?
The R&D tax credit is a tax credit that may be claimed by companies who have expenditures related to the research and development of new processes and products, among other things. To be eligible to claim the credit, companies must meet a series of tests determined by the IRS. The Protecting Americans From Tax Hikes (PATH) Act that was passed in 2015 made changes to the R&D tax credit that made it more accessible to many small businesses.
Eligible small businesses with less than $50 million in gross receipts may now offset the R&D credit against AMT (entity income tax liability). Eligible small businesses with less than $5 million in gross receipts may be allowed to offset the credit against payroll taxes.
Certain startups (qualified small businesses) may choose to take the R&D credit against a portion of FICA payroll taxes instead of income tax.
What does this mean for Justworks customers?
Justworks is able to process the R&D payroll tax credit on behalf of our customers as of the second quarter of 2017, which is the first quarter for which the payroll tax credit may be processed for any employer.
Important note: Justworks does not provide tax advice and is not able to confirm the eligibility of your company to take the R&D credit.
Is your company entitled to the R&D tax credit against your payroll taxes?
Whether your company is entitled to the R&D tax credit against your payroll taxes is determined based on your previous year's entity income tax return. The return would normally be filed in March or April, unless you requested an extension. You must apply an elected employer federal payroll tax credit in the 1st calendar quarter that commences after you file your company’s entity income tax return. Please consult with your tax advisor if you would like to confirm your entitlement to the credit or if you have any questions around how the credit might be claimed on your entity income tax return.
Your Next Steps to Taking the Credit
If you have not done so already, confirm the following with your tax advisor:
Your company’s eligibility to claim the credit
The amount of credit your company can claim
The amount of credit that should be taken (if any) against your entity income taxes vs. employer federal payroll taxes
Provide Justworks with a copy of an IRS Form 8974 with all information completed other than Lines 8 through 12 of Part 2. The IRS Form 8974 is available here.
Justworks will handle the rest! We’ll complete Lines 8 through 12 of Part 2 of the IRS Form 8974, and then apply the credit to the applicable portion of your employer federal payroll taxes due on Justworks’ aggregate quarterly payroll tax return (IRS Form 941). Then, we’ll pass through any applicable employer federal payroll tax savings to your company.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, legal or tax advice. If you have any legal or tax questions regarding this content or related issues, then you should consult with your professional legal or tax advisor