Research and Development Tax Credits for Qualified Small BusinessesNov 06, 2017
Research and development is an important part of starting and growing a successful business particularly in the ever-changing business environment so heavily reliant on technology in 2017. Innovation, introduction and improvement of products and processes can often times be the difference between a startup company’s success or failure. Recent Internal Revenue Service (IRS) developments have been designed to encourage small businesses to work on research and development earlier in their life cycle.
The IRS recently announced that qualified small business startups can elect to apply a portion of the business research tax credit against employer payroll taxes and employee Federal withholdings rather than applying it against their income tax liability. IRS officials have said it made this rule to benefit small businesses that may have very little to no income tax liability and allow them to benefit from applying the credit to other tax liabilities. Government officials hope this will help small businesses grow profitable more quickly as well as boost job creation.
The IRS defines research and development costs as “all expenditures incident to the development or improvement of a product”. It does not include marketing, surveys, management studies or other related costs. Details about how the IRS defines research and development costs are available on the IRS website at https://www.irs.gov/businesses/small-businesses-self-employed/current-year-deduction-of-research-development-expenditures.
According to the IRS website, any corporation or partnership whose gross receipts for the taxable year are less than $5,000,000 and which has not had gross receipts dating back further than five years qualifies for this special tax application. If this applies to your business, you can choose to apply up to $250,000 of your research credit towards your business’s payroll taxes and employee Federal withholdings.
Once you have determined that your business meets the criteria, you must fill out IRS Form 6765 for Increasing Research Activities and attach it to your timely filed tax return. To apply the credit toward your business’s payroll taxes you must then fill out Form 8974 and attach it to the Employer’s Quarterly Federal Tax Return, which is usually Form 941. Tax returns that have been approved for a filing extension can also still qualify.
Our Staff can help you determine whether the tax credits for business research and development are right for your business. We can also provide guidance on questions about whether your business qualifies, how to determine your gross receipts and what choices you have for applying for your tax credits.