Everyone knows the Research and Development Tax Credit has changed in a big way for startups. (OK, not everyone, but everyone should — especially tech startups, and Utah County is full of them). So listen up…
In the past, tech startups have never had an appetite to try to scrape together a Research and Development Tax Credit calculation because doing so didn’t save them any money, at least not in the current year. That’s because, in the past, the credit would only carry forward to a future day of income.
This is ironic because before the startup can turn a profit it probably plans to stage a harvest. Or, it will go bust. If it goes bust, it’s probably because it couldn’t use its tax credits.
#FearNoMore. For the first time ever, the startup won’t have to wait to use its Research and Development Tax Credit. Here’s how:
For starters, the startup must have fewer than $5 million in gross revenue and be in its first five years of business.
Next, it files its tax return claiming the Research and Development Tax Credit on Form 6765. Make sure to not take the optional election to reduce the credit as allowed by Section 280C. This will ensure the largest cash refund possible.
Now, check the box on the new line 41 of Form 6765 to tell the IRS: “You can keep your carry forwards. I’m taking my credit to offset my payroll tax, thank you very much.” This option is irrevocable so think about a couple of things first:
- Do you actually file Form 941 and pay payroll tax? If you outsource your payroll (a common trend) to a PEO, this strategy isn’t working for you. It may be time to consider running your own payroll under your own EIN. You’ll have to figure out something else for health insurance.
- It may be time to think about bringing your independent contractors on as employees.
Finally, complete the new Form 8974. This little beauty tracks how you use your shiny new payroll tax credit from quarter to quarter. And use it you will – beginning with the quarter that begins after you get your return filed. Get your return done by March 31st in order to use the credit in the second quarter, which starts April 1st. Miss that moment and you’re waiting until the third quarter to get your benefit.
Today, we worked up our first R&D-credit-turned-payroll-tax credit. Our client, a tech startup, has two developers creating software and has outsourced some development as well. Their Federal credit is $41,600. When they became a client, they didn’t know they qualified for the credit. Now, they’ll be getting a surprise cash refund.