By Published On: October 6, 2022

IRA Act of 2022 Doubles Payroll Tax Offset Provision to $500K

On August 16, 2022, President Biden signed into law the Inflation Reduction Act of 2022 (IRA). Contained within the law is an enhanced provision to the Federal Research and Development (R&D) Tax Credit that benefits startup companies.

Under the new IRA Act, beginning after December 31, 2022, startups now have the ability to elect an additional $250,000 of credit against the 1.45% employer portion of Medicare taxes.

Prior to this, startup companies were limited to utilizing the R&D tax credit to offset no more than $250,000 of federal payroll taxes. Specifically the 6.2% employer portion of social security tax.

This means that under the new law, the same startup companies now have the ability to double the amount of payroll taxes they can offset, up to $500,000. Further, any credits that are not elected to be applied against these payroll taxes will be classified as general business credit (GBC) and therefore any unrecognized benefit can be carried-forward for years to come, as GBC credits have a 20-year carryforward period.

“The IRA Act will certainly have a profound impact on key considerations that growing startups face when determining what amount of R&D investment they are able to take on,” said Michael Krajcer, President of Tax Credits Group.  “This new provision will most certainly allow larger-scale startup companies to further invest in R&D, which is what this credit is all about.”

It is expected that in the coming weeks the IRS will issue additional guidance on this topic.  Be sure to check back on the R&D Blog for more updates on the IRA Act, along with our own insights on how this new law will benefit startups.

About the Author: Bethany Jones-Worner

Bethany Jones-Worner is Managing Director of TCG. With a decade of experience in Research and Development Tax Credit consulting, she’s helped her clients in the banking, software and manufacturing industries save millions.