Payroll Briefs

Payroll Tax Credit for Qualified Small Businesses Increasing Research Activities

January 31, 2023

Previously, for tax years beginning before Jan. 1, 2023, a qualified small business could elect to claim up to $250,000 of its credit for increasing research activities as a payroll tax credit. The Inflation Reduction Act of 2022 (the IRA) increased the election amount to $500,000 for tax years beginning after Dec. 31, 2022. To take advantage of this payroll tax credit, an election must be made on or before the due date of the originally filed income tax return (including extensions) and have qualifying expenses.  

Qualifying Expenses 

Qualifying expenditures generally include the design, development or improvement of products, processes, techniques, formulas or software. They are broken into two categories:  

  1. In-house research expenses: The term “in-house research expenses” refer to any wages paid or incurred to an employee for qualified services performed by that employee, any amount paid or incurred for supplies used in the conduct of qualified research and any amount paid or incurred to another person for the right to use computers in the conduct of research. 
  1. Contract research expenses: The term “contract research expenses” refers to 65% of any amount paid or incurred by the taxpayer to any person for qualified research.  

How the Credit Works 

Starting in the first quarter of 2023, the payroll tax credit is first used to reduce the employer share of Social Security tax up to $250,000 per quarter, and any remaining credit reduces the employer share of Medicare tax for the quarter. If there is any remaining credit, it is carried forward to the next quarter. It’s important to note that the portion of the credit used against payroll taxes is allowed in the first calendar year quarter beginning after the date the qualified small business filed its income tax return.   

Qualifying small businesses must complete a  Form 6765, Credit for Increasing Research Activities to first make the election, and attach the form to your filed business income tax return. Once that is completed, you can claim the payroll tax credit by reporting the amount from Form 6765 on Form 8974, Qualified Small Business Payroll Tax Credit for Increasing Research Activities. 

Determining If Your Business Qualifies 

Wondering if your business qualifies? Working with our affiliate CPA and advisory firm Doeren Mayhew, we have the in-house tax expertise to help you determine if your business qualifies for this lucrative tax credit, and then apply it through our tax payroll management services. To learn more about this tax credit and our pay tax administration services, contact us today.