If you are a start-up or small business and you are eligible to claim a research & development (R&D) tax credit, you may be able to further increase the cash benefit thanks to two of the recent coronavirus relief packages.
Both the Families First Coronavirus Response Act (FFCRA) and the Coronavirus Aid, Relief, and Economic Security (CARES) Act provide employers with credits and incentives to use against their payroll taxes. These new refundable credits may be able to work alongside the R&D tax credit to increase your cash savings.
R&D Credit Background
Through the Protecting Americans from Tax Hikes Act of 2015 (PATH Act), the research tax credit became a permanent fixture of the U.S. tax code. It also introduced a new section 41(h) election so that a qualifying small business can elect to apply up to $250,000 of research credits against their payroll tax liability instead of their income tax liability.
To qualify for this election, a small business must meet two criteria (on top of the normal R&D credit qualifications):
- Gross receipts cannot exceed $5 million for the tax year; and
- No gross receipts for any tax years preceding the five-year-tax period ending with the credit determination tax year. For example, a business making the election for 2019 must not have had any gross receipts any tax year prior to 2015.
What new payroll tax credits are available in the relief bills?
On March 18, 2020, the FFCRA officially became U.S. law. Within the legislation are two types of refundable payroll tax credits for employers who pay employees for emergency COVID-19 self-care or the care of others affected by the virus. The two credits are 1) emergency sick leave payroll tax credit, and 2) emergency family medical leave payroll tax credit.
For more detailed information on the FFCRA payroll tax credits, visit here.
The CARES Act is full of both tax and non-tax provisions designed to help businesses and individuals during these uncertain economic times. One notable component of the legislation is the refundable employee retention credit (ERC) for certain qualified wages paid to qualified employees between March 13, 2020 and December 31, 2020. The amount of the credit varies depending on the size of your business:
- If you have more than 100 employees, the tax credit comes out to 50% of qualified wages up to $10,000 paid to employees who are not performing services. Therefore, the maximum credit per employee is $5,000.
- If you have 100 or fewer employees, the tax credit amounts to 50% of qualified wages up to $10,000 paid to any and all full-time employees. Similar to the one above, the maximum credit per employee is $5,000.
Another payroll-related aspect of the CARES Act is the allowance for employers to defer their portion of Social Security payroll taxes (generally, 6.2%) between March 27, 2020 and December 31, 2020. Under the guidance of the Internal Revenue Service (IRS), taxpayers who go this route must pay 50% of the deferred taxes by December 31, 2021 and the second half due by December 31, 2022.
You can learn more about the CARES Act and the other relief measures here.
So how does the R&D tax credit come into play?
Companies may be able to increase their immediate cash savings if they can first offset their FICA taxes with R&D payroll credits and have the excess of other credits refunded. For example, if an employer generates $100,000 of 2019 R&D payroll credits, qualifies for $250,000 of employee retention credits, and has $100,000 of employer-related FICA to pay on its Q2 quarterly Form 941 filing, the R&D credits can offset the FICA due, and $250,000 of the employee retention credits will be refunded as cash back to the taxpayer. Unlike R&D payroll offset credits, which would carry forward to future quarters, employee retention credits and FFCRA credits in excess of the total FICA tax amount due result in a cash refund to the taxpayer.
Keep in mind that you must meet certain filing requirements prior to receiving any cash benefit from your R&D credit. Also, analyzing qualified research activity and gathering documentation are necessary to support a calculated R&D tax credit. You should speak with your tax advisor about conducting an R&D tax credit study.
Start-ups and small businesses should consider R&D tax credits for payroll tax offset as part of evaluating payroll relief options to maximize cash savings opportunities. Squar Milner can help.
Not only do we have a robust team of tax professionals to help you develop comprehensive COVID-19 strategies, but we also have an experienced R&D Credit specialty group dedicated solely to performing extensive and thorough R&D studies. In fact, we can perform a preliminary assessment at no cost to you to determine if a viable R&D credit is available to you. Regardless of industry or company size, Squar Milner is here for you.
Disclaimer: This material has been prepared for informational purposes only, and is not intended to substitute for obtaining accounting, tax, or financial advice from a professional tax planner or financial planner. All information is provided “as is,” with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information.