Startups can now offset up to $250,000 in payroll taxes with R&D tax credits

April 2017

The PATH Act of 2015 made permanent the federal R&D tax credit, which benefits large and small companies in virtually every industry. It also enabled startups to benefit from the credit—even if they’re not paying federal income tax—by using it to offset up to $250,000 of their FICA payroll tax for 2016, and each of their next five taxable years, if they have: 
  • Gross receipts less than $5 million in the tax credit year;
  • No gross receipts for any taxable year preceding the 5-taxable-year period ending with the tax credit year; and
  • R&D credits of up to $250,000 that they can use in that year.                                        

What companies are eligible?

Although many businesses claim R&D credits—over 16,000 in 2013, the IRS estimates— our research shows many businesses that qualify are leaving money on the table, often for incorrect reasons. For more information on what companies are eligible check out the R&D FAQ section or use our R&D Tax Credit Calculator.

Reasons Many Companies (Mistakenly) Don’t Claim R&D Credits

In our annual survey of tax executives, many told BDO that they weren’t claiming R&D credits for one or more of the following reasons:

Source: 2017 BDO Tax Outlook Survey

Many of these reasons, however, are incorrect or overstated:
  • Activities do not need to be “groundbreaking”—or even succeed—to qualify;
  • Claiming credits on an original return doesn’t mandate a tax audit; and if credits are audited, they are no longer subject to the “Tier One” level scrutiny to which they had been a few years ago;
  • The size of a company isn’t directly relevant to the size of its credits; credits are calculated based on qualified spending, not on sales. In 2013, per the IRS, almost 250,000 corporations with receipts under $25,000,000 reported R&D credits;
  • Although prior to 2016 the credit couldn’t be used against AMT, it can be now, by privately-held companies with no more than $50 million in average gross receipts for the preceding three taxable years; and
  • There are no specific documentation requirements, and numerous court cases—including by the U.S. Tax Court—affirm that R&D credits can be substantiated with oral testimony.

What should companies do?

The time to pursue these credits is now. Startups—and any business who meets the three criteria above—should not hesitate to contact a qualified agency to determine whether they can take advantage of the federal R&D tax credit and the new payroll offset. Many can still claim these credits during Q2 and into September if they file an extension.

BDO offers a simple, complimentary review that provides businesses information needed to make an informed decision about whether and how to pursue R&D tax credits generally, and the payroll offset in particular.

Our team of R&D software developers, engineers, scientists, accountants, and lawyers have helped thousands of companies claim over $3 billion in R&D benefits, and we’ve supported more than 90 percent of those benefits on examination by tax authorities.