Many of our clients claim their R&D tax credit and then go on to apply these credits against future payroll taxes. This is a dollar for dollar offset of a Qualified Small Business’ (QSB) OASDI liability (reported quarterly on Form 941). Note that any amount claimed as a credit against your payroll tax is not allowable as a payroll tax deduction.
Only QSBs can elect the payroll tax credit. According to the IRS, your business is considered a QSB if it has the following characteristics:
- It is not publicly traded
- It has less then $5 million in gross receipts for the tax year in which you are claiming the R&D tax credit
- It did not have gross receipts for any tax year preceding the five-tax-year period ending with the credit year. (For tax year 2018, your company could not have had gross receipt (revenue) in 2013 or prior.)
QSBs that intend to elect the payroll tax credit should know of a few limitations:
- The QSB can only apply up to $250k of their R&D tax credit against future payroll taxes. Any remaining credits can be applied toward income tax or carried forward for 20 years.
- The QSB can elect the payroll tax credit for up to five consecutive years, up to $1,250,000.