The payroll tax credit is the ability for many small businesses to apply their R&D tax credits against future payroll taxes. We’ve put together a few tips below for qualified small businesses to keep in mind as you plan for tax season in the spring. Finally, there are some limitations to keep in mind regarding the payroll tax credit.
To qualify as research and development per the Internal Revenue Code (§41), the taxpayer must show that the activities pass the four-part test. Today we are focusing specifically on the process of experimentation test (§41(d)(1)(C)). The term process of experimentation means a process that involves the evaluation of more than one alternative designed to achieve a result where the means of achieving that result is uncertain at the outset. Software development projects typically follow a certain development methodology such as: Generally speaking, these methodologies are processes of experimentation and include a cycle of requirements gathering and specification, design, coding, testing, performance tuning, and product release. Oftentimes certain sub-processes during development are repeated or iterated as the software is built to … Read More
There could be many reasons why your business may not owe income tax in a given tax year. But you are certain your business conducts research and development (R&D), has expenses related to R&D, and would like to claim the R&D tax credit. What options do you have? While it is true you mainly use the R&D tax credit to offset income taxes, dollar for dollar, recent changes to the tax law, specifically the PATH Act, now allows qualified small businesses to apply up to $250,000 of their R&D tax credit against payroll taxes. A qualified small business (QSB) has: Keep in mind, you must have payroll (i.e. W2, full-time employees) to owe payroll taxes. In addition, as a QSB, … Read More
In our previous blog, we went over the different types of qualified research expenses that go into the R&D tax credit calculation. While these are just a few of the inputs that go into a complicated formula, how much can you expect to get in R&D tax credits? A reasonable back of the envelop estimate is anywhere between 6% to 11% of the sum of your qualified research expenses (primarily driven by wages, supplies, and contractors). There are two methods of calculating the R&D tax credit: the Regular Credit calculation and the Alternative Simplified Credit calculation. Each method has a different formula, but they both use qualified research expenses as an input. The formula that is ultimately used depends on … Read More
Since R&D “spend” drives the R&D tax credit, we are often asked, “What actually qualifies as an R&D expense?” The taxable wages of employees who conduct R&D, directory supervise or support qualified activities are inputs into the R&D tax credit calculation. Typically, some percentage of the employees W-2 box 1 wage is considered based on the time spent conducting, supervising, or supporting R&D. Often times, but not always, wages will drive the majority of a client’s R&D tax credit. The costs of supplies used in qualified activities are also inputs into the R&D tax credit calculation. These supply costs exclude depreciable capital assets (such as expensive equipment), land, and improvement to land. General administrative supplies are also excluded. Examples of … Read More
We at Tax Credit Hero want to take a moment to wish individuals, businesses small and large, and CPAs a Happy Tax Day! You can expect more useful blogs in the coming months now that the spring tax season has wrapped up. Please let us know if you have a specific question or topic regarding R&D tax credits you’d like us to cover!
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
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
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
We at Tax Credit Hero are wishing you, your family, and business a prosperous 2018! Below are important tax year 2017 deadlines.