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R&D Tax Credits Expanded by The Inflation Reduction Act

The Inflation Reduction Act of 2022 signed into law by President Biden contains several provisions, including modifications to the payroll tax R&D credit for qualified small businesses (QSB).

Current law allows QSBs to use R&D tax credits to offset social security payroll tax liability.  This provides an avenue for QSBs to see benefit from R&D tax credits when they have no income tax liability.  The Inflation Reduction Act increases the existing $250,000 payroll tax credit cap per year to $500,000.  The new law also allows the payroll tax credit to be used against Medicare payroll taxes in addition to social security payroll taxes.  Signed on August 16th, these changes take effect for tax years beginning after December 31, 2022.

A QSB is defined as a company that has current year gross receipts of less than $5 million and has no gross receipts prior to the five-year period ending with the current tax year.  An election must be made on an original return to use the R&D tax credit against payroll taxes.  To make the election, the business must complete Section D, “Qualified Small Business Payroll Tax Election and Payroll Tax Credit,” of Form 6765.  A business continuing to meet the definition of a QSB may continue to make this election for a total of five years.

Earnd can help you analyze if your company is a QSB and the most effective way to utilize R&D tax credits.