NEW AND REVISED FORMS TO BE ISSUED FOR OFFSETTING PAYROLL TAXES

Recently, the IRS issued draft versions of the 2017 Form 941, Employer’s Quarterly Tax Return and the 2016 Form 6765, Credit for Increasing Research Activities, reflecting the provision in the “Protecting Americans from Tax Hikes Act of 2015” (PATH Act) that allows a “qualified small business” to elect to claim a portion of its research credit as a tax credit against its employer FICA tax liability.

These draft revisions came after the IRS announcement that taxpayers claiming this new incentive be required to file a new form, Form 8974, Qualified Small Business Payroll Tax Credit for Increasing Research Activity. (Currently, Form 8974 is also only available in draft form.)

Procedurally, when claiming the new incentive, the taxpayer must first file its tax return, and then can begin offsetting payroll taxes in the calendar quarter following the filing. (For example, a taxpayer filing its 2016 return on March 15, 2017 could begin to offset the quarterly FICA Tax Payment due June 15, 2017.)

IMPORTANT NOTES:

• The credit cannot exceed a taxpayers FICA liability for a calendar quarter, but any excess credit can be carried forward into later quarters.
• When filing, Form 8974 must be attached to Form 941.
• Once made, elections can’t be revoked without the IRS’ consent.

ABOUT THE PAYROLL TAX OFFSET:

The PATH Act retroactively extended the research credit (which had expired at the end of 2014) and made it permanent. In addition, for tax years that begin after Dec. 31, 2015, the PATH Act provided an election for “qualified” small businesses to claim a portion of their research credit as a payroll tax credit against their employer FICA tax liability, rather than against their income tax liability. (Code Sec. 41(h) and Code Sec. 3111(f)).

Small businesses defined – businesses with gross receipts of less than $5 million for the taxable year, and that didn’t have gross receipts for the five preceding years, ending with the current taxable year—may take the research and development tax credit against the employer’s share of the Social Security portion of FICA taxes, rather than against income tax liability.

The credit is equal to the least of the following amounts:

• The amount of the research credit determined for the taxable year;
• $250,000;
• For qualified small businesses other than partnerships or S corps, the amount of the general business credit carry-forward from the taxable year.