Sooner Rather Than Later – Timing for Taking Your R&D Payroll Tax Credits
Recent legal advice issued by the IRS Associate Chief Counsel helps clarify some of the confusion around the new payroll tax credit for research and development (R&D) for qualified small businesses (QSBs).
In the guidance, the IRS concluded that an employer takes into account the R&D payroll tax credit for a quarter against liability for employer Social Security tax starting with the first payroll payment of the quarter that includes payments of wages subject to Social Security tax to its employees. The credit may be taken to the degree of employer Social Security tax on wages associated with the first payroll payment, and then to the extent of employer Social Security tax associated with succeeding payroll payments in the quarter until the credit is used.
How much should you enter on the Record of Federal Tax Liability?
With respect to a payment of wages subject to Social Security taxes, the employer should reduce tax liability by the lesser of: (A) the amount of the employer Social Security tax on the wages, or (B) the available payroll tax credit.
Carrying credit over
If any payroll tax credit is remaining at the end of the quarter that has not been used because it exceeds the amount of employer Social Security tax on wages paid during the quarter, the excess credit may be carried over to the succeeding quarter and treated as a payroll tax credit for that succeeding quarter under Code Sec. 3111(f)(3).
The IRS reasoned that an employer knows the maximum amount of payroll tax credit potentially available for a quarter at the beginning of the quarter because the income tax return reflecting the payroll tax credit election on Form 6765 must have been filed before the quarter begins in which the employer can claim credit. However, the amount of the payroll tax credit that is allowed for the quarter is limited to the employer Social Security tax on wages paid to employees during the quarter.
Thus, as the employer makes payments of wages from the beginning of the quarter for which the payroll tax credit is taken, the employer can take the payroll tax credit into account for purposes of the Schedule B and for purposes of deposit liability on the Form 941 or other employment tax return, provided the employer later files Form 8974 (Qualified Small Business Payroll Tax Credit for Increasing Research Activities) with the Form 941 or other employment tax return for the quarter. Form 8974 is used to determine the amount of the QSB payroll tax credit that an employer can claim on Form 941.
With respect to the timing of the payroll tax credit for purposes of calculating deposit liabilities, the credit should be taken against deposit liabilities and reflected on Schedule B as the employer incurs liability for employer Social Security tax on wages paid in the quarter to which it applies, beginning with the first payment of wages in the quarter. It would be counter to the purpose of the payroll tax credit to allow it as a credit only when the employer files its Form 941 for the quarter claiming the credit and not as the employer is paying wages during the quarter subject to employer Social Security tax. An employer cannot take the payroll tax credit against employee Social Security tax or income tax withholding.
Contact an Armanino professional if you have questions about the R&D payroll tax credit. For more information, please visit our website at www.armaninollp.com.