Qualified Small Business Payroll Tax Credit for Increasing Research Activities

Start-up businesses regularly generate losses and are cash flow strapped in the early stages of getting off the ground. This presents a challenge for companies attempting to justify the costs associated with properly vetting and claiming credits for research and development spend when these credits are generally applied against federal and state income tax liabilities.

The Protecting Americans from Tax Hikes (PATH) Act of 2015 dramatically changed the playing field for start-up businesses by enacting provisions of tax law that allow qualified small businesses (“QSB”) to elect the application of their research credits claimed as payroll tax credits against the employer portion of their Social Security tax liabilities. The benefits were expanded for 2023 and subsequent tax years by the Inflation Reduction Act of 2022 through an increase in the maximum amount of the credit that can be applied against payroll tax liabilities from $250,000 to $500,000 and the allowance of the credit to be applied in addition against the employer portion of Medicare tax.  

The QSB payroll tax credit presents a unique opportunity to more immediately monetize federal R&D credits for start-up businesses, which in many cases epitomize exactly the type of companies for which the R&D credit was created. The requirements to be considered as a qualified small business are outlined in IRS Notice 2017-23 and generally are as follows for corporations (including S corporations) as well as partnerships:

• The business has gross sales of less than $5,000,000 for the taxable year for which the election is being made.
• The business did not have sales reported on a tax return for any taxable year before the five taxable year period ending with the taxable year of election.

There are certain additional factors that may be applicable against a taxpayer’s specific facts and circumstances, but in general the requirements are straightforward for most companies looking to take advantage of this valuable cash flow infusion opportunity.

Smith + Howard: R&D Tax Credit Services

Smith + Howard’s experienced Specialty Tax Services team brings a holistic view to the R&D tax credit process and will work closely with you to maximize the R&D credit savings available to your business.

Working with our team, you will gain confidence and satisfaction in the outcome of your engagement as you experience a high standard of service, a responsive approach to communication, and a fixed fee that does not involve contingencies.

To learn more about Smith + Howard’s Specialty Tax Services, contact Brad Pittman at [email protected]