In December 2015, Congress passed the PATH Act of 2015, which enabled small, start-up businesses to use the R&D Tax Credit to offset the employer portion of payroll taxes, up to $250,000. To qualify as a small, start-up, the Taxpayer must have less than $5,000,000 in gross receipts for the year and have no receipts before the prior five taxable years. This provision went into effect for tax years starting in 2016, so Taxpayers with gross receipts prior to 2012 are ineligible.
On March 30, 2017, Notice 2017-23 was issued to provide interim guidance for businesses claiming the R&D Tax Credit against the employer portion of payroll taxes. Taxpayers must make the election on the filing form for the R&D Credit (Form 6765), for tax years started in or after 2016. However, the credit cannot be applied against payroll tax credits until after the election has been made. If you forgot to make the election, you can fortunately amend your return to make the election and take the credit in the following quarter, so long as the amendment is made before December 31, 2017 and includes a statement that the election is being made pursuant to Notice 2017-23.
When applying the research credit against payroll tax, the taxpayer will use a new form, Form 8974, in conjunction with its payroll tax form, such as Form 941. The new form helps track how much of the credit (up to $250,000) is applied to payroll tax in each quarter, with unused portions able to be carried forward to future quarters.
Finally, in most cases, Taxpayers will want to forego the reduced credit election of Sec. 280C, as it will maximize the amount of credit available to offset payroll tax credits: typically a greater liability for small, start-up businesses.