New IRA Act Bolsters R&D Tax Credit; May Drive Taxpayers to Accelerate R&D and Job Creation
Beginning on January 1, 2023, innovative startups will find themselves with an opportunity to save significantly more money on their federal payroll taxes.
The favorable tax change stems from the Inflation Reduction Act (IRA) which was signed into law in August 2022. The Act effectively doubles the amount of Research and Development (R&D) tax credits that startup businesses can use to offset their payroll taxes.
Since 2016, startups developing new and improved products have been able to utilize the R&D tax credit to offset a limited portion of payroll tax; up to $250,000 of credit against the 6.2% employer portion of FICA, for up to 5 years. Now, under the IRA Act, they will also be able to utilize an additional $250,000 of credit against the 1.45% employer portion of Medicare tax for the same 5-year time period.
In theory, an eligible startup who has never before claimed this credit will now have the ability to offset up to $2.5MM in tax liability. And because the R&D tax credit is part of the general business credit, any credits which are not elected against these payroll taxes in a given year can also be carried-forward up to 20 years into the future.
“This taxpayer favorable legislation will bring a greater benefit to high-tech, biotech, pharmaceutical and medical device companies located within Ohio that are aggressively investing in R&D to bring new groundbreaking products to fruition,” said Michael Krajcer, TCG President. “And because there is a limited 5-year window of opportunity to claim this benefit, we expect many large startups will accelerate their product development timelines and roadmaps in order to fully maximize this benefit.”
Currently, there remains uncertainty as to whether a taxpayer will need to max out the $250K reduction in their FICA taxes before any remaining R&D credit can be applied against the employer portion of Medicare taxes. If so, the benefits of the new law will bias toward larger startups with many employees who are paying high amounts of payroll tax. If however the intention behind this new law is to provide startups with the ability to offset a portion of their Medicare taxes while also offsetting a portion of their FICA tax, even small-scale companies paying little payroll tax will see at least some financial reward.
“It is likely that we will see smaller-scale startups accelerate their hiring efforts in order to maximize these enhanced payroll tax savings,” added Margaret Krajcer, TCG Vice President and General Counsel. “Since the R&D credit can be used to offset payroll taxes for all employees, not just those performing research, startups may end up accelerating the hiring of all positions including R&D, administrative and operations.”
It is anticipated that the IRS will issue further guidance on the recent law change in the coming weeks. Be sure to check back in on the R&D blog for updates.
If you have a question on the R&D tax credit, or are interested in learning about whether and if your startup company might be eligible for it, be sure to contact us today: Free Assessment – Tax Credits Group (tcgtax.com)