Monetize R&D Tax Credits: Start-ups and Small Businesses (KROST)

Business Opportunities
August 15, 2021 - KROST Certified Public Accountants & Consultants

This is a thought leadership article about monetizing research and development tax credits from PrimeGlobal member firm KROST in North America. It is of particular relevance to start-ups and small businesses. 

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The Protecting Americans from Tax Hikes (PATH) Act of 2015 made it possible for start-ups and small businesses to qualify for a tax credit of up to $250,000. Start-ups and small businesses that were previously unable to benefit from the research and development (R&D) tax credits due to lack of taxability should take advantage of the payroll tax liability offset.

Payroll Tax Liability Offset

Effective for tax years beginning after December 31 2015, Qualified Small Businesses (“QSB”) may elect to use R&D credits to offset up to $250,000 of payroll tax liability. A QSB is a corporation, partnership, or individual with less than $5 million of gross receipts during the taxable year and did not have gross receipts for any tax year before the fifth tax year ending with the year of the claim. The payroll benefit can be claimed in the first quarter subsequent to filing the prior year income tax return. For example, the earliest an eligible taxpayer filing March 15 2021 could realize the payroll tax benefit would be with the second quarter Form 941 filed in July.

Form 8974, "Qualified Small Business Payroll Tax Credit for Increasing Research Activities”, is used to claim the payroll tax liability offset. The Form 8974 will also act as an intermediary between the revised quarterly employment tax Form 941 and the annual “Credit for Increasing Research Activities” Form 6765 filed with the income tax return. It is important to note the Form 8974 will need to be attached to the employment tax Form 941 for each quarter the R&D credit is applied against the taxpayer’s payroll liability.

Case Study: Qualified Small Business

Founded in 2017, a Company performing R&D activities has been in losses since inception. The Company does not generate an annual income tax liability due to the losses incurred. As such, the Company has not claimed the research credit. In 2020, the Company estimates gross receipts of $2 million with an estimated payroll tax liability of $100,000 in 2021. Our R&D Tax Credit experts calculated $220,000 of federal research credit. The Company may elect to offset $100,000 of 2021 payroll tax liabilities and carry forward $120,000 of unused R&D credits to offset future payroll tax obligations.

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KROST Certified Public Accountants & Consultants

Established in 1939 in Pasadena, California, KROST, is a full-service Certified Public Accounting and Consulting firm serving clients across various industries. Our focus is recognizing opportunities and creating value for our clients by equipping them with the tools to make better business and financial decisions for the future. As trusted advisors, our clients depend on us to provide timely information, innovative solutions, and result-driven teamwork to ensure success.

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