Last month, the IRS released a memorandum clarifying exactly how start-up companies can use the R&D Tax Credit to offset their payroll tax liabilities. Before the memo, there was some confusion as to whether or not start-ups needed to wait until the end of the year to apply the R&D credit against their payroll taxes. The IRS has clarified that start-up companies may apply the R&D credit to offset estimated payments. Hence, these companies are not required to wait until the end of their tax year when filing to claim the R&D credit.
In this memo, the IRS is continuing to clarify laws laid out in the Protecting Americans from Tax Hikes (PATH) Act of 2015. In March of this year, the IRS released another memo about how start-ups can determine gross receipts for the purpose of being classified as a start-up business. Start-ups can claim up to $250,000 of R&D credits to offset payroll liabilities, but must have less than $5 million in gross receipts for the tax year to be eligible. The earlier guidelines explained how start-ups should calculate the receipt number.
The clarifications will help start-up companies moving forward. Former Senior Counsel to the U.S. Senate Finance Committee and alliantgroup National Managing Director Dean Zerbe was quoted in Tax Notes stating, “A lot of taxpayers have been unsure as to whether they had to wait until the end of the quarter to get the benefit, and this [memo] confirms that they don’t.”
The IRS has been slow to issue guidance in the past, which can deter start-ups from claiming the credit. According to Jeff Malo of Andersen Tax LLC, the new memo reaffirms that the R&D credit is, “a genuine credit offsetting a payment obligation rather than as a refund claim.”
The new memo also includes examples to demonstrate how to apply the credit on an amended return and how to apply the credit to deposits made during the payroll period. Any taxpayer making elections on their tax returns filed on extension can apply the credit for September and January 15 quarterly payments. This official guidance confirms R&D practitioners’ previous interpretation.