Start Ups Can Choose New Option for Claiming Research Credit

Practice Areas

By: Christine Mirador

Eligible startup businesses can choose to apply all or part of their research credit against payroll tax liability, specifically against the employer’s Social Security or old age, survivors, and disability insurance (OASDI) tax liability, (which is equal to 6.2% of covered wages up to the taxable wage base), instead of applying all of it against their income tax liability. Earlier, taxpayers could only take their research credit against income tax liability. This option came through the Protecting Americans from Tax Hikes (PATH) Act, which, in addition to making the R&D credit permanent, also included additional surprising taxpayer-friendly bonuses.

 Eligible startup businesses should have gross receipts of less than $5 million and should not have gross receipts prior to 2012. Businesses who qualify could apply up to $250,000 of its research credit against payroll tax liability. This is especially beneficial for startups that have little to no income tax liability.

To choose this option, fill out Form 6765 and attach it to the timely-filed return. Eligible businesses that already filed their income tax returns for 2016 but failed to choose this option, could still file an amended return by December 31 2017.

After choosing this option, eligible startup businesses could claim the payroll tax credit by filling out Form 8974, and should file the said form together with payroll tax return, Form 941.