Notice 2017-23 -Interim Guidance, Election by Qualified Small Business to Claim Payroll Tax Credit for Increasing Research Activities, March 30, 2017
This notice from the IRS provides interim guidance for making the payroll tax credit election under Section 41(h). This is a new provision under the PATH Act, passed in December 2015. The notice provides guidance on determining gross receipts for purposes of Section 41(h) to meet the requirements for an eligible qualified small business. It also provides guidance on the timing of electing the payroll tax credit and claiming the credit.
Defining Qualified Small Businesses – Gross Receipts:
The notice clarifies that to determine “gross receipts” for purposes of Sec 41(h), investment income (interest, dividends, rents and royalties) should be included to determine the $5,000,000 limit (section 1.448-1T(f)(2)(iv)). In addition, the de minimis rule under 1.41-3(c)(2) excluding gross receipts from years before the first year a taxpayer earns $25,000 does not apply.
From the guidance it appears that in determining receipts for purposes of section 41(h), even an insignificant amount of income, whether sales revenue or investment income, in a tax year preceding the five years will disqualify the taxpayer from being eligible as a qualified small business.
The notice also explains the aggregation and allocation rules for controlled groups, which treats all members of a controlled group (as defined in Section 1.41-6(a)(3)(ii)) as a single taxpayer for purposes of determining gross receipts. Therefore, the aggregate gross receipts of all members of a controlled group for a taxable year must be taken into account in determining its eligibility as a qualified small business.
Time and manner of election:
The notice states that a qualified small business makes a payroll tax credit election by completing the appropriate portion of Form 6765 relating to the payroll tax credit election and attaching the completed form to the qualified small business’s timely filed return for the taxable year to which the election applies.
A qualified small business claiming this election on its employment tax return must complete Form 8974, Qualified Small Business Payroll Tax Credit for Increasing Research Activities, and attach the form to that employment tax return. If the qualified small business files an annual employment return (rather than quarterly) the notice provides that payroll tax credit is claimed on the annual employment tax return that includes the first quarter beginning after the date on which the business files the return reflecting the election.
The guidance clarifies that excess payroll tax credits can be carried forward to subsequent quarters beyond the first quarter.
The notice provides that if a qualified small business failed to make a timely payroll tax credit election on its original return for a tax year beginning after 12/31/2015, the taxpayer can make the election by filing an amended return on or before December 31, 2017.
The notice applies payroll tax credit elections made with respect to taxable years beginning after December 31, 2015.