Legislative Background of Qualified small business payroll tax credit for increasing research activities:
The Consolidated Appropriations Act, 2016 (H.R.2029) was signed into law by the president on December 18, 2015. This law allows a qualified small business to elect for any taxable year to claim a certain amount of its research credit as a payroll tax credit against their employer’s portion of the social security tax liability rather than the federal income tax liability for the business.
Qualified small business for this credit is defined as Corp, S-Corp, or Partnership with gross receipts of less than $5 million for the taxable year and no gross receipts for any taxable year before the five taxable year period ending with the year in which the credit is allowed. More information on requirements is available on IRS Forms 6765 and Form 3800 Instructions. Also IRS issued Notice 2017-23 with interim guidance explaining how eligible small businesses can take advantage of a new option enabling them to apply part or all of their research credit against their payroll tax liability, instead of their income tax liability.
The ability to take a credit against the employer portion of Social Security tax begins the 1st calendar quarter following the date the employer actually files its federal Business income tax return (e.g., Forms 1120, 1065, etc.; Form 1120 is due to be filed by the 15th of the 3rd month after the end of the tax year, Form 1065 is due to be filed by the 15th day of the 4th month after the end of the tax year). This would apply for both calendar and fiscal year taxpayers so the initial date of when such credit can first be taken will vary by taxpayer.
For tax years beginning after December 31, 2015, a qualified small business may elect to claim up to $250,000 of its credit for increasing research activities as a payroll tax credit against the employer’s share of social security tax. The first year the credit can be claimed on the employer’s business income tax return is 2016. The first employment tax return that could be impacted by the credit would be in second quarter 2017.The election and determination of the credit amount that will be used against the employer's share of social security tax is made on Form 6765, Credit for Increasing Research Activities. The amount from Form 6765, line 44, must then be reported on Form 8974, Qualified Small Business Payroll Tax Credit for Increasing Research Activities. Form 8974 is used to determine the amount of the credit that can be used in the current quarter. The amount from Form 8974, line 12, is reported on Form 941 or 941-SS, line 11. Form 8974 must be filed with the employment tax return or the credit will be disallowed.
The credit claimed cannot exceed the employer portion of social security tax liability on the employment return. Any excess credit can be taken on subsequent employment returns.
This credit does not expire.
What this means to you the client?
If you are eligible for an R&D Credit, ADP Totalsource can file for a refund on your behalf. Refunds are based on the prior quarter’s withholding of Social Security taxes paid by the employer.
How is this done?
Submission of forms
ADP Totalsource requires the following information from our clients.
· IRS form 6765
· IRS form 8974
· RD_Credit_form - Client absolution letter
The IRS form 6765 is completed by the client based upon their corporate tax filings and calculation of the R&D credit.
The initial IRS form 8974 is completed by the client. Credits are refunded based upon the withholding for the previous quarter. In the event that a full credit is not absorbed, the following quarter will have a credit refund processed. In this instance, the ADP Totalsource team will complete any additional forms needed to fully absorb the credit.
The RD_Credit form is completed once and must be signed by an authorized individual for the client.
Refund Credit Process
1. Clients will work with either their assigned Human Resource Business Partner or Payroll Service Representative. The required documents are to be packaged and sent to the appropriate ADP contact
2. A case will be created in either Clarify or Henry. The required documents are to be included in the case. The cases are to be submitted to the following queues.
· Clarify – COG: TAX
· Henry – Tax Processing
3. The Tax Processing team will forward the appropriate documentation to the Tax Service center for inclusion with our quarterly 941 filings.
4. The IRS will send a refund check to ADP Totalsource after they process our quarterly filings.
5. Upon receipt of the refund check from the IRS. The Tax team will alert our Finance partners to credit the client on their upcoming payroll for the amount of credit due.
Frequently asked questions
Q. Do I qualify?
H.R. 2029 - The “Consolidated Appropriations Act, 2016” (Division Q - “Protecting Americans from Tax Hikes Act of 2015”, Title 1) was signed into law by the President on December 18, 2015 adding new sections 41(h) and 3111(f) to the Internal Revenue Code. Pursuant to this law, eligible businesses may receive tax credits to help offset their investments in qualified research and development activities. “Eligible small business” may use the credit to offset their alternative minimum tax liability. “Qualified small businesses” may elect to apply up to $250,000.00 of the credit against the employer portion of social security taxes.
· An eligible small business is a corporation whose stock is not publicly traded, a partnership, or a sole proprietorship who has less than $50 million in average annual gross receipts for the three preceding taxable years.i
· A qualified small business is a corporation (including an S corporation) or partnership with: 1. Gross receipts of less than $5 million for the tax year, and 2. No gross receipts for any tax year before the 5-tax-year period ending with the tax year. A qualified small business does not include a tax-exempt organization under I.R.C. section 501.ii
Additional requirements are specified in IRS forms 6765 and 3800
Q. When am I eligible for the credit?
A. A client is eligible to file for the credit in the quarter after they file their corporate return. An example is below:
- Corporate return filed Feb 15, 2018. Client is eligible to begin taking credits in 2nd Qtr 2018.
Q. How much is my refund?
A. Refunds are determined by two factors, the overall refund amount and the withholding for a calendar quarter. In the example below, we outline a typical refund
Overall refund amount $100,000.00
Qtrly withholding for SS $10,000.00
Refund due to client $10,000.00
Amount carried over $90,000.00
We will continue to apply the withholding for the quarter in question against the remaining credit amount until it is fully absorbed. There is no up-front refunding of the entire credit if it exceeds the quarterly withholding.
Q. Who does the IRS send the refund payment to?
A. The filing is done under the ADP Totalsource federal ID. Refund checks are sent to ADP Totalsource in our name.
Q. How long do refunds take to come back from the IRS?
A. This varies. We are given the standard verbiage by the IRS that they can take up to 8 weeks after receipt of our 941 filings. Due to the complexity of the ADP Totalsource filings, refunds can exceed the 8 week timeframe given.
Q. What happens when we do not receive the refund in 8 weeks?
A. A tax team member contacts the IRS on a weekly basis inquiring as to the status of outstanding refunds.
Q. How does the client receive their refund?
A. Upon receipt of the refund check from the IRS. The team reconciles to ensure we have received the requested amount. The team then notifies the Finance team to post a credit to the client’s account which will offset their upcoming payroll invoice.
Q. What happens if I submit my documents late?
A. ADP files on a set calendar schedule. Upon receipt of the case, the Tax representative will inform you via your case if you have submitted in a timely fashion to be included in the next quarter’s filing. If you are submitting in a timeframe after the cutoff, the Tax team will submit the refund request via an amended filing.
Q. How long do refunds take for amended returns?
A. The timeframe for receipt is the same as a timely filing. Amendments in general are filed after the normal quarterly filings which will delay their processing. The processing timeframe is the standard eight weeks, barring any issues arising within the IRS.