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Small Business StartUp New Research Credit Claims, Explained



The Internal Revenue Service (IRS) offers eligible small business startups a new option to claim research credit.

Previously, you are only allowed to take your research credit against your income tax liability. 
 
If you are filing your 2016 federal income tax return, you can apply partially or all of your research credit against your payroll tax liability, provided your small business meets the eligibility qualifications. But if you have already filed and failed to choose this option, you can still file an amended return. Make sure you file the amended return by December 31, 2017. 
 
This new option fulfills the new provision specified in the Protecting Americans From Tax Hikes (PATH) Act. PATH was enacted in December 2015.
 
IRS makes a small note that small business startups could most benefit from this option since they have little or no income tax liability.
 

 

What is research and development tax credit?

The Congress created research and development (R&D) tax credit. It is part of the Economic Recovery Tax Act of 1981. As a rule, the Alternative Minimum Tax may not be offset. incremental calculation of net credits allows for a dollar-for-dollar offset of tax liability.
 
There are states that offer research and development tax credits plus other attractive incentives with the objective to drive interest among business owners to move business operations to their local areas.
 

Small Business Eligibility

Small businesses are eligible with the following qualifications—
  • Your business should show gross receipts of less than $5 million
  • Your gross receipts prior to 2012 are not included

Application Guide for Eligible Small Business

  • You can choose to apply up to $250,000 of the research credit against your payroll tax liability.
  • Fill out the Credit for Increasing Research Activities or Form 6765 and attach this form to your business income tax return.
  • Fill out the Qualified Small Business Payroll Tax Credit for Increasing Research Activities or Form 8974. Attach this form to the payroll tax return.
 
The IRS published an interim guidance covering important information related to the term “qualified small business” (QSBs) including relevant details of the time and filing process to claim the credit. At the end of the document, a section exhibits a joint request from the Treasury Department and IRS appealing for comments on the interim guidance to include other issues affecting payroll tax credit elections requiring additional guidance.
 
 
__________________

References:

Internal Revenue Service. “For Small Business Startups, IRS Explains New Option for Claiming Research Credit; Option Still Available for Those That Already Filed.” Retrieved on April 11, 2017 from https://www.irs.gov


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