On December 18, 2015, President Obama signed into law the Protecting Americans from Tax Hikes (PATH) Act of 2015. This bill made more than 20 tax relief provisions permanent. Additionally, this piece of legislation now provides a new incentive for certain “Start-Up” entities.
Starting in 2016, any entity whose gross receipts is less than $5 million and had no gross receipts for any taxable year preceding the five-taxable-year period ending with the year in which the credit is allowed, may be eligible to elect to use the applicable research credit to offset their payroll tax liability. Often times, “Start-Ups” or new entities are reluctant to track their research expenses because they do not anticipate having taxable income to offset the credit. Now, there is a possibility for a substantial benefit in the first year of operations. Generally, the payroll tax credit portion of the research credit is limited to the lesser of $250,000 or the calculated research credit. Additionally, businesses typically must add-back to income the corresponding calculated R&D credit. If you are claiming the research credit against your payroll tax liability, there is no requirement to reduce your deductions for the research expenditures.
The payroll tax credit may be made by making an election which has a deadline on or before the due date (including extensions) of the business’s income tax return. The credit is made against the payroll tax liability for the first calendar quarter which begins after the date on which the business files its income tax return for the tax year of the election.
If you are interested in claiming this credit or learning more about what expenses may qualify as bona-fide research expenditures, please contact Michael Weber or Shawn Firster at 412.338.9300 with any questions or comments.
