The Protecting Americans from Tax Hikes Act created a permanent incentive for eligible start-up companies to pursue R&D activities within the United States.
The Internal Revenue Code (IRC) Section 41 tax credit for qualifying in-house and contract research activities already existed, but early-stage companies that had not yet incurred income tax liability could not take advantage of it. The Act revised the Section 41 credit allowing taxpayers to apply up to $250,000 credit against their share Social Security, or FICA, tax for their employees rather than against income tax. The revision became effective for tax years after December 31, 2015.
With the passage of the Inflation Reduction Act, the maximum R&D Tax Credit against payroll taxes has been doubled for tax years beginning after December 31, 2022. Eligible small businesses can now reduce payroll taxes by up to $500,000 annually, up from the prior limit of $250,000. Additionally, the credit can now apply to the Medicare portion of taxes, used to offset the 1.45% employer portion of Medicare payroll tax liability (previously, it only applied to the Social Security portion of payroll tax). Taxpayers with more credit than liability can carry forward unused amounts.
• Eliminate Technical uncertainty, including software
• New or improved business process or product development
• Process of experimentation
• Uncertainty of an outcome
Bruce Kletsky is the Managing Director USA FI Group, Inc. He is a Member of the LIAFPN specializing in helping organizations achieve maximum benefit from tax programs such as the R&D Credit. He can be reached via email at:
Tel: (630) 947-6802.