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.
A qualified small business for this credit is defined as Corp, S-Corp or Partnership with gross receipts of less than $5 million over a five-year period and no gross receipts before the five-year period ending with the tax year. More information on requirements is available in the attached IRS documents.
IRS Form 6765 Instructions.pdf
IRS Form 3800 Instructions.pdf
IRS Notice 2017-23.pdf
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 day 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.
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 a Research and Development (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? Required Forms
ADP TotalSource requires the following documents:
· IRS form 6765
· R&D Credit Election Form
You will complete the IRS form 6765 based upon your corporate tax filings and calculation of the R&D credit.
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 TotalSource team associate will complete any additional forms needed to fully absorb the credit.
The R&D Credit Form is completed once and must be signed by an authorized individual for the client.
Questions or concerns? Please visit the attached link: Frequently Asked Questions.pdf
ADP TotalSource® Tax Compliance