The Service Issues New Administrative Authority Governing R&D Tax Credit Claims for Start-Up Companies

On Thursday, March 30th the Department of the Treasury (hereinafter the “Treasury Department”) and Internal Revenue Service (hereinafter the “Service”) issued interim administrative guidance in the form of IRS Notice 2017-23 clarifying how eligible start-up companies (i.e., those companies with less than $ 5 million in gross receipts and earning revenue for less than 5 years) can take advantage of a new option enabling them to apply part or all of their R&D Tax Credit against their federal-level payroll tax liability, instead of their income tax liability. As a reminder prior to January 1st of 2016, taxpayers could only take the R&D Tax Credit against their income tax liability.

IRS Notice 2017-23 and Applying for the R&D Tax Credit

It should be duly noted that an eligible start-up company with qualifying R&D expenditures can now choose to apply up to $250,000 of its R&D Tax Credit against its federal-level payroll tax liability. From a tax compliance perspective, an eligible start-up company chooses this option by preparing Form 6765 entitled “Credit for Increasing Research Activities” and attaching this form to a timely-filed business income tax return. However under newly issued IRS Notice 2017-23, an eligible start-up company that failed to choose this option on a recently filed 2016 tax return earlier this tax season can still make the election by filing an amended tax return on or before December 31, 2017. Upon selecting this option, an eligible start-up company claims the payroll tax credit by preparing Form 8974 entitled “Qualified Small Business Payroll Tax Credit for Increasing Research Activities”. This form must be attached to its payroll tax return (e.g., Form 941 entitled “Employer’s Quarterly Federal Tax Return”).

IRS Notice 2017-23 also requests public comment on other payroll tax credit issues to be addressed in future forms of administrative guidance expected to be issued in the coming months. Please note that public comments in response to this notice are requested on or before July 17, 2017.

For a complimentary consultation on the scope and application of IRS Notice 2017-23, please contact Peter J. Scalise, Federal Tax Credits & Incentives Practice Leader for PM Business Advisors at pscalise@pmbusinessadvisors.com