In December, the House of Representatives introduced a bill to boost the research credit for new and small businesses. The bill, Research and Development Tax Credit Expansion Act of 2019, would potentially impact taxpayers who are eligible to offset their payroll tax liability with the research credit. The expanded credit would increase the benefit available and allow more businesses to qualify.
Background – Current Law
The research credit was originally enacted as a reduction of income tax liability. For over 30 years the research credit temporarily expired every 12 to 24 months, until the PATH Act of 2015 permanently extended it. The PATH Act also provided an additional election specifically for start-ups (under Section 41(h) of the Internal Revenue Code), allowing them to use the credit against payroll tax instead of income tax. This new law significantly helped new and small businesses, as in their early pre-profitable years they could not benefit currently from the research credit, since they might not be subject to income tax.
Qualified small businesses (businesses with less than $5 million in current year gross receipts and no receipts for years preceding the 5-year period including the current tax year) can now use the research credit to offset payroll tax for up to five years. They can use up to $250,000 annually of their research credit to offset payroll tax liability. This election must be made on an original, timely-filed tax return.
Proposed Changes to the Credit
The new House bill further expands the payroll tax offset opportunity. The bill proposed the following modifications for qualified small businesses:
- Annual credit refund cap increases from $250,000 to $500,000
- Gross receipts limit increases from $5 million to $10 million
- Refundable amounts will cover all payroll taxes paid by such businesses (including unemployment tax and Medicare, instead of only FICA)
Also proposed in the bill was an increase in the alternative simplified credit rate (from 14% to 20%) for taxpayers eligible for making the payroll tax offset election.
Small Businesses will benefit
If Congress passes the bill, it will generate immediate cash savings for start-up companies. For eligible businesses, the bill would double the amount of research credit that could offset payroll tax, up to $500,000 per year for five years. Also, slightly larger start-up companies ($5 M – $10 M in receipts) would be eligible and could take advantage of the election to offset payroll tax, since the eligibility threshold is doubled from $5 million to $10 million in receipts.
These changes would increase cash and help to fund additional growth for start-ups and other small businesses. It’s a definite win for new companies incurring research expenditures who are looking for ways to continue fueling innovation.
Keep in mind that eligible businesses can already take advantage of this payroll tax offset election, even if the bill is not enacted into law.
Please contact us if you have additional questions about how the research credit can help new and small businesses recover cash.
About Amy, Executive Director, is a CPA with a Master in Business Taxation from the University of Minnesota. Amy has been serving clients in the research credit field for over 20 years. She lives in a suburb of Minneapolis with her 3 kids and husband.