Wage-paying small businesses with minimal taxable income can now take advantage of their research credits sooner than was allowed under the previous tax rules.  The Protecting America from Tax Hikes Act of 2015 allows qualifying small businesses to apply research credits against the social security portion of its federal payroll tax bill. Key facts about the election follow:


A qualifying small business for purposes of this election must meet the following two requirements:

  1. Gross receipts for the election year must be less than $5 million, and
  2. Must have no gross receipts for the preceding five-taxable-year period ending with the current tax year.

Making the Election

The election is made on Form 6765, Credit for Increasing Research Activities.  Under a special rule for 2016, the IRS will allow a qualifying small business that has already filed its 2016 tax return to file an amended return by December 31, 2017 to take advantage of the election.  The qualified small business can then start reducing their federal payroll tax bills for the first calendar quarter beginning after the date on which it filed its tax return.

Limits on the Election

Research credits can only be used to offset the employer’s portion of Social Security taxes.  They cannot be used to offset the employer’s Medicare taxes or any FICA taxes that are withheld from employees’ wages.  The maximum amount that can be applied against payroll taxes cannot exceed $250,000 annually.

For More Information

These are just the basics with respect to the payroll tax election.  Your tax advisor can assist in determining the benefits of the election to ensure that you are maximizing all available incentives.