Effective January 1, 2016, the PATH Act provides a payroll tax credit offset of up to $250,000 for qualified small businesses. Companies that were in loss positions that would normally not have filed for the credit, because they had no tax liability, can now benefit from the Research and Development (R&D) tax credit. The enhanced ability for small businesses to currently use the credit should result in more immediate cash benefits for many companies, particularly start-ups, because they will not have to wait until they generate taxable income to take advantage of the credit savings.

If you can check all the boxes below, then you likely have an opportunity to file for a refundable R&D tax credit.

☐ You are a corporation (including an S corporation) or partnership.
☐ Your Company performs qualified R&D and meets the four-part test listed below:

  1. You are developing a new or improved product or process that enhances performance, functionality, reliability, or quality
  2. You are working to eliminate technical uncertainties related to capable, methodology or appropriateness of design while creating new or improved products/processes
  3. Your Company performs a process of experimentation to solve technical challenges, and
  4. All research activities being performed rely on a hard science (i.e. computer science, engineering, chemistry)

☐ Your Company has gross receipts of less than $5 million for the current tax year and prior five years.
☐ Your Company has expenses related to the employer portion of the FICA excise tax. Specifically, this would be the employer’s portion of the Social Security or old age, survivors, and disability insurance (“OASDI”) tax equal to 6.2% of covered wage.

The election to use your R&D tax credit to offset payroll expenses can be filed with your 2016 tax return. The payroll tax offset would then be available for calendar quarters following the filing of the income tax return on which the election is made.

Navigating through this incentive, first time filers can face issues and potential pitfalls typically associated with the R&D tax credit. Companies interested in pursuing the payroll tax credit opportunity should consult with an experienced tax professional, particularly in regards to making the determination of whether to make an irrevocable election to claim the payroll tax credit offset.

If you have any questions regarding the applicability of the PATH Act to your company, please contact:

Joel Gardosik of CFGI Tax Services, LLC at jgardosik@cfgi.com or

Kathleen Erlich of CFGI Tax Services, LLC at kerlich@cfgi.com