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Eligible small businesses may be able to take advantage of a new provision allowing them to apply the Sec. 41 research tax credit against their payroll tax liability. Prior to 2016, taxpayers could only take the research credit against their income tax liability.

Under Sections 41(h) and 3111(f), a qualified small business can elect to apply a portion of its Sec. 41 research credit against the employer portion of Federal Insurance Contributions Act (FICA) payroll taxes. This provision is effective for tax years beginning after December 31, 2015. In order to be considered a qualified small business, a business must have gross receipts of less than $5 million for the current tax year and must not have had gross receipts for any tax year before the five-tax-year period ending with the current year.

If eligible, small businesses with qualifying research expenses can elect to apply up to $250,000 of its research credit against its payroll tax liability. To make this election, form 6765, Credit for Increasing Research Activities, must be timely filed along with the business’s income tax. If 2016 returns were previously filed without making the election, amended returns are being accepted until December 31, 2017. The payroll tax credits are then claimed by filing form 8974, Qualified Small Business Payroll Tax Credit for Increasing Research Activities. This form must be attached to the business’s payroll tax return.

Source: Journal of Accountancy