Encore Partners
  • About Us
    • Who We Are
    • Client Testimonials
    • Careers
  • Services
  • Insight
  • Contact
  • Client Portal
  • Client Payments
  • Suralink
  • Menu Menu

Apply the research credit against payroll taxes

June 6, 2022/in News, Tax Tips - Business/by Betty Kim

Here’s an interesting option if your small company or start-up business is planning to claim the research tax credit. Subject to limits, you can elect to apply all or some of any research tax credits that you earn against your payroll taxes instead of your income tax. This payroll tax election may influence some businesses to undertake or increase their research activities. On the other hand, if you’re engaged in or are planning to engage in research activities without regard to tax consequences, be aware that some tax relief could be in your future.

Here are some answers to questions about the option.

Why is the election important?

Many new businesses, even if they have some cash flow, or even net positive cash flow and/or a book profit, pay no income taxes and won’t for some time. Therefore, there’s no amount against which business credits, including the research credit, can be applied. On the other hand, a wage-paying business, even a new one, has payroll tax liabilities. The payroll tax election is thus an opportunity to get immediate use out of the research credits that a business earns. Because every dollar of credit-eligible expenditure can result in as much as a 10-cent tax credit, that’s a big help in the start-up phase of a business — the time when help is most needed.

Which businesses are eligible? 

To qualify for the election a taxpayer:

  • Must have gross receipts for the election year of less than $5 million and
  • Be no more than five years past the period for which it had no receipts (the start-up period).

In making these determinations, the only gross receipts that an individual taxpayer takes into account are from his or her businesses. An individual’s salary, investment income or other income aren’t taken into account. Also, note that neither an entity nor an individual can make the election for more than six years in a row.

Are there limits on the election? 

Research credits for which a taxpayer makes the payroll tax election can be applied only against the employer’s old-age, survivors and disability liability — the OASDI or Social Security portion of FICA taxes. So the election can’t be used to lower 1) the employer’s liability for the Medicare portion of FICA taxes or 2) any FICA taxes that the employer withholds and remits to the government on behalf of employees.

The amount of research credit for which the election can be made can’t annually exceed $250,000. Note too that an individual or C corporation can make the election only for those research credits which, in the absence of an election, would have to be carried forward. In other words, a C corporation can’t make the election for research credits that the taxpayer can use to reduce current or past income tax liabilities.

The above Q&As just cover the basics about the payroll tax election. And, as you may have already experienced, identifying and substantiating expenses eligible for the research credit itself is a complex area. Contact us for more information about the payroll tax election and the research credit.

Tags: Tax Credit
Share this entry
  • Share on Facebook
  • Share on Twitter
  • Share on LinkedIn
  • Share on Telegram
  • Share by Mail
https://encorepartnersllp.com/wp-content/uploads/2022/06/RD-3.png 292 560 Betty Kim https://encorepartnersllp.com/wp-content/uploads/2021/02/Logo_hex2-1030x266.png Betty Kim2022-06-06 08:00:002022-06-21 17:26:28Apply the research credit against payroll taxes
You might also like
Planning for year-end gifts with the gift tax annual exclusion

Newsletter Signup

    Connect With Us

    Categories

    • Encore Culture
    • Events
    • News
    • Tax Tips – Business
    • Tax Tips – Individual

    Search

    Recent Posts

    • The 2022 gift tax return deadline is coming up soon – April 18March 24, 2023 - 8:00 am
    • Changes in Sec. 174 make it a good time to review the R&E strategy of your businessMarch 17, 2023 - 8:00 am
    • Do you run a business from home? You may be able to deduct home office expensesFebruary 24, 2023 - 11:18 am
    • Key tax issues in M&A transactionsFebruary 17, 2023 - 8:00 am

    Get the latest tax and finance news

    right in your inbox

    2 + 4 = ?

    Encore Partners Logo

    Main Office
    4350 Executive Drive
    Suite 260
    San Diego, CA 92121
    858.549.7100

    Beverly Hills Office
    9595 Wilshire Blvd,
    Suite 900
    Beverly Hills, CA 90212
    310.300.8480

    © Encore Partners LLP 2021 – all rights reserved

    site design by digitalstoryteller.io

    © Encore Partners LLP 2021 – all rights reserved
    site design by digitalstoryteller.io

    Thinking about converting your home into a rental property?5 Tax implications of divorce Scroll to top

    This site uses cookies. By continuing to browse the site, you are agreeing to our use of cookies.

    Accept All CookiesRefuse Cookies

    Cookie and Privacy Settings



    How we use cookies

    We may request cookies to be set on your device. We use cookies to let us know when you visit our websites, how you interact with us, to enrich your user experience, and to customize your relationship with our website.

    Click on the different category headings to find out more. You can also change some of your preferences. Note that blocking some types of cookies may impact your experience on our websites and the services we are able to offer.

    Essential Website Cookies

    These cookies are strictly necessary to provide you with services available through our website and to use some of its features.

    Because these cookies are strictly necessary to deliver the website, refusing them will have impact how our site functions. You always can block or delete cookies by changing your browser settings and force blocking all cookies on this website. But this will always prompt you to accept/refuse cookies when revisiting our site.

    We fully respect if you want to refuse cookies but to avoid asking you again and again kindly allow us to store a cookie for that. You are free to opt out any time or opt in for other cookies to get a better experience. If you refuse cookies we will remove all set cookies in our domain.

    We provide you with a list of stored cookies on your computer in our domain so you can check what we stored. Due to security reasons we are not able to show or modify cookies from other domains. You can check these in your browser security settings.

    Google Analytics Cookies

    These cookies collect information that is used either in aggregate form to help us understand how our website is being used or how effective our marketing campaigns are, or to help us customize our website and application for you in order to enhance your experience.

    If you do not want that we track your visit to our site you can disable tracking in your browser here:

    Other external services

    We also use different external services like Google Webfonts, Google Maps, and external Video providers. Since these providers may collect personal data like your IP address we allow you to block them here. Please be aware that this might heavily reduce the functionality and appearance of our site. Changes will take effect once you reload the page.

    Google Webfont Settings:

    Google Map Settings:

    Google reCaptcha Settings:

    Vimeo and Youtube video embeds:

    Other cookies

    The following cookies are also needed - You can choose if you want to allow them:

    Privacy Policy

    You can read about our cookies and privacy settings in detail on our Privacy Policy Page.

    Accept settingsHide notification only