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Use R&D Credit To Help Pay Payroll Taxes?

Updated: Feb 1, 2023

How many times have you received a phone call to inform you that your auto warranty is about to expire and then to offer you a “convenient and affordable way to extend it”? (I really wish the CIA would give the Iranian leader’s private phone number to those telemarketers. While they’re at it, give them the North Korean leader’s as well! They might then be so busy trying to stop those calls that they would leave other people alone!)

Well in the accounting world, not only do we get those same phone calls, but we also get a whole pile of emails from “experts” wanting to sit down with all our clients to help them maximize their Research and Development Credit.

The R&D credit has been around for a long time. What these “email sharks” are really all trying to trick us with, is the change to the R&D credit in the PATH Act of 2015. It allows a small business to choose to use all or part of the credit to offset certain federal payroll taxes.

Basically, this whole thing is for businesses who have been in business for 5 years or less. The normal R&D credit equals 20% of the excess of qualified research expenses for the year over a base amount. The “base amount” is a fixed-base percentage (not to exceed 16%) of average annual receipts from a trade or business, net of returns and allowances, for the four years prior to the year of claiming the credit. It can’t be less than 50% of the annual qualified research expenses. Thus, the minimum credit is equal to 10% of qualified research expenses (50% times the 20% credit).

There is an alternative to that complicated formula. A company can take the “simplified credit” which is 14% of the amount by which qualified expenses exceed 50% of the average for the three preceding tax years.

Here’s where the offset of payroll taxes occurs. A qualifying company may elect to use the offset R&D credit against up to $250,000 of payroll taxes. They must be able to demonstrate that they have had less than $5 million in gross receipts over the last five years and zero gross receipts before the five-year period. Basically, this is aimed at “startup” businesses. Now there is a “caveat” here. The ”payroll tax” to offset is just the employer’s share of Social Security Tax.

Can you tell me how many businesses do R&D, are considered a new “startup” of 5 years of fewer, and have large enough payroll already that their annual share of employer social security is large enough to make this worth it? To hit the maximum, it would mean having payroll of over $4,000,000. (There are some complicated forms to file, special computations to make, accounting records to be reconfigured, etc.)

If you think your business might qualify for this, ask your CPA to explain it to you and go over what your potential payroll tax offset might be. WARNING. The payroll offset might not be much more than the fee your CPA will charge to compute it.

Have you heard? Job 36:19a says, “Will your cry for help avail to keep you from distress…?”

Kelly Bullis is a Certified Public Accountant in Carson City. Contact him at 882-4459. On the web at Also on Facebook.

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