Maximizing the R&D Credit to offset Payroll Tax

by | Apr 3, 2023 | Tax Credits, Uncategorized

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As a business owner, you’re always looking for ways to reduce your tax bill and keep more of your hard-earned money. One often-overlooked option for small and mid-sized businesses is the Research and Development (R&D) tax credit. Many associate the R&D tax credit as only being available to those in high tech industries. However, the R&D tax credit is available to any business that invests in innovating its products, processes, or software.

What many people don’t realize is that the R&D tax credit can also be used to offset payroll taxes. This means that businesses that are not yet profitable or that have a low tax liability can still benefit from this credit.

In order to use the R&D tax credit against payroll taxes, there are several qualifying criteria that must be met.

Eligibility:

The company must be eligible for the R&D tax credit, which generally includes companies that are engaged in developing new or improved products, processes, or software. Additionally, the company must have gross receipts for five or fewer years, less than $5 million in gross receipts in the year the credit is elected and be conducting qualifying research activities. 

Payroll Tax Liability:

To use the R&D tax credit against payroll taxes, the company must have a payroll tax liability.

Credit Amount:

The amount of the credit that can be used against payroll taxes is limited to a maximum per year of $250,000 until 12/31/2022. Recently the Inflation Reduction Act of 2022 increased the maximum credit amount to $500,000 for tax years beginning after 12/31/2022. The credit can be applied against the employer’s portion of the social security tax only, not against the employee’s portion or other payroll taxes, such as Medicare or federal income tax withholding.

It is important to note that there are other qualifying criteria that must be met to claim the R&D tax credit, and the rules and regulations surrounding the credit can be complex. It is recommended that companies consult with a tax professional who is experienced in claiming the R&D tax credit to ensure that all the qualifying criteria are met.


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