Last year, many early-stage companies significantly reduced payroll taxes thanks to a new federal tax credit including many of our start-ups in the tech industry. The Qualified Small Business (QSB) R&D Tax Credit, passed into law in 2015, allows qualified small businesses to offset OASDI (i.e. social security) taxes with R&D tax credits originally claimed on federal income tax returns. The 2018 calendar year presents yet another opportunity for companies to realize these savings. How are these credits achieved?
1. Assess Eligibility – Companies must have less than $5MM of revenues and no revenues prior to 2013. The credit is most applicable to companies with early and high expenditures in R&D before starting to generate revenue. Common examples include companies in deep technology, biotech & life sciences, and manufacturing. Further, companies with at least $300K in annual payroll are most-likely to realize a material benefit.
2. Plan Ahead – Companies seeking QSB R&D Credits this year must first claim the credit on 2017 federal income tax returns. Since a company may not amend an income tax return for the credit, it is important that companies interested in this credit NOT file federal income tax returns without first assessing whether or not they qualify for the credit. Remember, savings cannot be realized until one quarter AFTER the income tax return is filed. Thus, if you're planning on taking advantage of the QSB Credit opportunity DO NOT WAIT! 2017 Returns must be filed before March 31st, 2018 if you want to bank these savings by the second quarter of 2018.
3. Seek Assistance – While QSB Credits often produce significant savings, they are not a “free lunch.” Not only do companies without experience in this area run the risk of leaving savings on the table, but they could also incur interest and/or penalties related to payroll tax mistakes. Reach out to an advisor for assistance in assessing if QSB Credits make sense for your business.
Author: Tom Nally
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