A new interim guidance, recently issued by The Internal Revenue Service, provides small business owners some relief. According to Notice 2017-23, eligible businesses can take advantage of a new option which enables them to apply part or all of their research credit against their payroll tax liability.

This is big news for taxpayers who previously could take only the research credit against their income tax liability. This new option will be available for the first time to any eligible small business filing its 2016 federal income tax return this tax season as well as to those who have already filed. The new payroll tax credit is especially attractive to eligible startups that have little or no income tax liability. To qualify for the current tax year, a business must:

• have gross receipts of less than $5 million and
• could not have had gross receipts prior to 2012.

An eligible small business with qualifying research expenses has the option to apply up to $250,000 of its research credit against its payroll tax liability. This can be done by filling out Form 6765, Credit for Increasing Research Activities, and attaching it to a timely-filed business income tax return. Don’t worry if you failed to choose this option and still wish to do so. Under a special rule for the 2016 tax year, eligible small businesses can still make the election by filing an amended return by Dec. 31, 2017.

Further details on how and when to claim the credit or more information on the research credit itself, contact one of our tax professionals today.