Small Business Offset for Payroll Tax and AMT
When can you recall new tax laws being good news for manufacturing? U.S. manufacturers and technology companies are only beginning to realize that federal income tax provisions contained in the recently enacted Protecting Americans from Tax Hikes Act of 2015 (PATH Act) are certainly worth being excited about. The PATH Act, which was signed into law in December 2015, made the R&D tax credit a permanent piece of the federal tax code and created additional benefits for small and startup companies.
Offset Against AMT:
Eligible small businesses can now use the credit to reduce alternative minimum tax (AMT) as well as regular tax. This change in the tax law will have a profound effect on S-corporations and limited liability corporations regarding returns filed for 2016 and subsequent years, as the income tax benefits for these entities were severely limited by AMT in prior years.
Eligible small businesses are defined as:
- Corporations, partnerships, and sole proprietorships that had average gross receipts of $50 million or less during the prior 3 years
- The corporation’s stock is not publically traded.
Offset Payroll Taxes by up to $250,000 per year:
Qualified small businesses may be able to offset a portion of their payroll taxes using R&D credits. Such businesses interested in saving valuable payroll tax dollars should understand these key points:
- Beginning in 2017, qualifying businesses may offset the 6.2% FICA portion of their payroll taxes using R&D tax credits claimed on their 2016 and future federal returns.
- Qualified small businesses are defined as corporations or partnerships having gross receipts of $5 million or less during the taxable year, and that did not have gross receipts for any year preceding the 5 year period ending with the taxable year.
- R&D tax credits are applied against quarterly payroll tax payments. In any given year, the maximum payroll tax offset allowed is $250,000.
- Payroll tax savings can be realized in 2017, after the corporation’s 2016 federal return has been filed.
- Unused credits can be carried forward and used against future payroll tax payments.
- IRS has released a new Form 8974 to be filed with the quarterly Form 941.
To demonstrate how the new regulations would apply to a typical startup company, have a glimpse of the following example:
A manufacturing company founded in 2014 was established by two college friends for the purpose of developing, producing and selling a line of state-of-the-art components for the consumer sound-system market. The owners of the business invested their personal savings into the enterprise and by late 2015 had sold their first 1000 products for a sum of $500,000.
Entering 2016, the company had seven employees on staff, including the owners, all of whom received a W2 salary. Throughout 2016, the company continued its product development and manufacturing efforts, which resulted in revenue of $1,500,000 while incurring $480,000 of qualifying research expenses. In early 2017, the company filed its 2016 tax year return, showing a net loss of $150,000 and an R&D credit of $48,000. Using the R&D tax credit, the company was able to offset $11,500 of the FICA portion of its second quarterly payroll tax payment in 2017. The excess R&D tax credit of $36,500 was then carried forward to offset the payroll tax payment for subsequent quarters.