How to apply R&D tax credits against payroll taxes

With the spring tax season wrapping up soon, we wanted to answer some common questions specific to the payroll tax credit (using R&D tax credits to offset payroll taxes). The payroll tax credit is available to companies that meet both of these criteria: 1. Have less than $5 million in gross receipts in the tax year claiming the credit. 2. Have gross receipts for five years or less. Yes. $250,000 per year up to five years. The payroll tax credit can offset the OASDI (Social Security) portion taxes for all employees (not just your R&D employees). You can start applying your R&D tax credit against payroll taxes the first quarter after claiming your R&D tax credit on your Federal tax … Read More

Using estimates in claiming your R&D tax credit

Now that we are in tax season, you may be thinking about your personal taxes and taking a deduction from all the old junk from your garage you donated last year. How do you determine the value to deduct? One solution is to dig out old receipts, perhaps depreciate certain items, and sum it all up. Obviously that is too cumbersome a task for most people. A realistic solution is to just estimate the value. We often hear concerns from our clients regarding estimating R&D expenses for the R&D tax credit. Similar to the example earlier, you can also estimate the expenses that go into your R&D tax credit calculation. Let’s take a real life example from a Tax Credit … Read More

How does the new tax bill affect the R&D tax credit?

The Tax Cuts and Jobs Act was signed into law by President Trump on December 22nd, 2017. This sweeping tax overhaul will affect almost every individual and business. CCH Group did a fantastic job summarizing the over 500-page tax bill here. This is a must read for all individuals and business owners to understand how you will be affected. In short, it doesn’t. However, it is important to note the repeal of the corporate alternative minimum tax or AMT in the new tax bill which will affect how companies can use their R&D tax credit. Prior to the passage of the Tax Cuts and Jobs Act, corporations calculated their tax burden using two methodologies: the regular tax method and the … Read More

Tax Year 2017 Deadlines

We at Tax Credit Hero are wishing you, your family, and business a prosperous 2018! Below are important tax year 2017 deadlines.

Confusion with the Tax Bill Overhaul and the R&D Tax Credit

***Update*** As it turns out, the passage of the GOP’s tax bill, which President Trump signed into law on December 22, 2017, does, in fact, remove the corporate alternative minimum tax. This is a huge benefit for businesses claiming the R&D tax credit as they are no longer limited in using their tax credit due to AMT. We should begin seeing the implications in 2019. ======== Early Saturday (12/2/2017) morning, the Senate passed the new tax plan adjusting the corporate tax rate from 35% to 20%. There were many additional provisions in this bill, but one that stood out, interestingly, was that the Senate preserved the corporate alternative minimum tax (AMT) (instead of repealing it as proposed in the bills … Read More

Guidance for the R&D Tax Credit

There are three levels of authority R&D tax credit providers use for identifying, claiming, and substantiating your R&D tax credits. Internal Revenue Code Federal tax law begins with the Internal Revenue Code (IRC). The IRC refers to Title 26 of the U.S. Code, commonly known as the IRS tax code. While the IRC is organized into multiple sections, Sections 41 and 174 provide the official guidance for identifying, claiming and substantiating the R&D tax credit. U.S. Treasury Regulations The U.S. Treasury Regulations provide the official interpretation of the IRC by the U.S. Department of the Treasury. In fact, the organization of the Treasury Regulations and the IRC are similar. For example, Section 41(b) of the IRC is 1.41-2 in the … Read More

Documentation Requirements for the R&D Tax Credit

In Treasury Decision 9104, the IRS surprisingly decided not to define or require specific documentation to substantiate an R&D tax credit claim. Instead, you’ll often see the IRS refer to § 6001 of the Internal Revenue Code which states that a taxpayer claiming a tax credit shall retain records in a sufficient manner. Needless to say, while documentation is important, guidance regarding documentation is lacking. Tax advisors start by looking at your accounting and financial systems to gather documents such as previous tax returns, payroll records and general ledgers. However, this information alone is not enough to calculate the R&D tax credit. Your tax advisor then begins to delve deeper into your projects while applying the four-part test understand if … Read More

Payroll Tax Credit Timeline

If your business is a Qualified Small Business conducting R&D activities, you can use your R&D tax credit to offset your business’s OASDI tax liability. There are two moving parts in this process to remember. First, you must claim credits on your Federal tax return. If you follow a calendar year end, your taxes are due either March 15th or April 15th. If you extend, then you get an additional 6 months. The IRS states that the payroll tax credit can be used the first calendar quarter beginning after the date on which it files its income tax or information return for the tax year. That means, if you file your Federal tax return on March 15th, you can start … Read More

Payroll Tax Credits for businesses using CPEOs

Many small businesses outsource management tasks such as employee benefits, payroll, and worker’s compensation to Professional Employer Organizations (PEOs). Congress, in 2014, passed the Small Business Efficiency Act (SBEA) allowing voluntary certification by the IRS for PEOs. Now, certified PEOs (CPEOs) are enabled to process R&D tax credits as payroll tax credits for eligible clients. Recall that only qualified small businesses (QSBs) can elect to use their R&D tax credits to offset payroll taxes. A QSB is defined as a corporation, partnership, LLC, or individual with less than $5 million in gross receipts in the current tax year and each of the preceding 4 years and zero gross receipts for year preceding the 5-year period. If you are a QSB … Read More

Internal Use Software Exclusion

The computer software exclusion (not to be confused with the computer software business component) is specific to internal use software (IUS). The intent of this exclusion is to exclude activities related to IUS such as installing or implementing SAP, Oracle, or Windows. Officially, the IRS considers IUS to be software tailored for general and administrative functions including: human resources, finances, and support services. However, as technology advances, many activities related to internal use software appear to qualify as R&D. For instance, a client uses Microsoft SharePoint for their company Intranet. SharePoint is highly customizable and can be tailored to a company’s needs. Thus, the company appoints someone in their IT department to assist in customizing certain functions within SharePoint. Does … Read More