Are you a small business owner? If so, you may qualify for an enhanced research tax credit.
August 16, 2022 – The federal law known as the Inflation Reduction Act (IRA) gives to your qualifying small business new opportunities:
• It increases the refundable research and development (R&D) tax credit that your small business may claim from $250,000 to $500,000 per year.
• It allows your small business to use the R&D tax credit to further reduce its payroll taxes and several other business expenses by up to $500,000 per year.
Eligible businesses
Your small business is eligible for the enhanced R&D tax credit if it meets the following requirements:
- It is a corporation, partnership, or any other person
- Its gross receipt for the taxable year is less than $5 million, and
- It doesn’t have any revenue for any taxable year preceding the 5-taxable-year period ending with such taxable year.
Noneligible businesses
The following organizations are not eligible:
- Nonprofit organizations;
- Political organizations;
- Private foundations; and
- Any other organizations exempt from income tax.
Eligible research
To qualify for the R&D tax credit, your small business must meet the following requirements:
- Perform research to eliminate technical uncertainty about the development or improvement of a product or process, including computer software, techniques, formulas, and inventions.
- Undertake research to discover information that’s technological in nature.
- Perform research that is intended for use in developing a new or improved business product or process.
- Perform research as part of a process of experimentation that is related to a new or improved function, performance, reliability, or quality.
Payroll tax election
Your small business may elect to apply its R&D tax credit against the following payroll taxes:
- FICA: the employer portion of the Social Security tax at 6.20%.
- Medicare: the employer portion of the Medicare tax at 1.45%.
Your small business may claim as an R&D tax credit to offset its payroll tax for a maximum amount of $5 million over 5 years.
Effective Date
Your small business can apply for the expanded payroll tax offset of the R&D tax credit from January 1, 2023.
The R&D tax credit is the Federal Government’s tax break to foster businesses’ innovation and technological advancement in areas such as design, product development, processes, techniques, formulas, or internal use computer software or inventions to be sold or used in their trade or business. Through their research, discovery, and innovation, they will create jobs and support economic growth.