Use It or Lose It: Claim R&D Credits by December 31 for Q1 2018 Benefits

By Michael Silvio, Tax Director

The deadline for a tremendous opportunity for startups is approaching rapidly. Internal Revenue Service Notice 2017-23 extends the deadline to amend 2016 tax returns and claim research and development (R&D) credits against payroll taxes to Dec. 31.

The policy allowing small business startups to claim up to $250,000 in credits per year against the payroll tax liability instead of the income tax liability was initiated in 2016. Eligible firms can earmark the credits against payroll for the first quarter after the filing. For businesses that did not have time to get an R&D analysis in before returns were due have another shot at claiming these tax credits in the first quarter of 2018. Businesses that miss the deadline will miss the opportunity to earmark any 2016 R&D credits against payroll taxes. They will have to wait until they file 2017 returns to claim 2017 R&D credits and will be unable to reap the benefits until the following quarter after that filing.

Does your startup qualify?

The credits themselves offer substantial savings to companies that develop new or improved products, processes and/or software and which meet the following four-test criteria:

1. Technical uncertainty: the activity works to eliminate technical uncertainty about the development or improvement of the product or process.

2. Process of experimentation: the activity involves some form of experimentation to eliminate or resolve the technical uncertainty.

3. Technological in nature: the experimentation process adheres to a hard science standard such as engineering, computer science, chemistry, physics, etc.

4. Qualified purpose: the purpose of the activity is to create a new or improved product or process.

The extended deadline applies to new businesses – in existence less than five years – with gross receipts of less than $5 million in the tax year.

Use It Or Lose It

Don’t hesitate! If your business meets the qualifications to claim the R&D credit against payroll tax liability, begin the process now by ensuring your company is conducting an R&D analysis as necessary and gathering documentation as soon as possible. Don’t forgo the immediate benefits of the IRS extension. Contact your Hall and Company CPA today and take advantage of this extension.