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New Guidance on Small Business Payroll

New Guidance on Small Business Payroll Tax Credit for Research

Small businesses may now choose to apply a portion (or all) of their qualifying research credit against payroll tax liability instead of income tax liability, according to Accounting Today.

The IRS has provided details in a new notice that explains how the option to elect the new payroll tax credit may especially benefit any eligible startup that has little or no income tax liability. To qualify for the new option for the current tax-year, a business must have gross receipts of less than

$5 million and could not have had gross receipts prior to 2012.

Before 2016, taxpayers could only take the research credit against their income tax liability, but thanks to the PATH Act legislation passed at the end of 2015, they have this new option. Here is a look at the process, according to the IRS

  • An eligible small business with qualifying research expenses can choose to apply up to $250,000 of its research credit against its payroll tax liability. 
  • The business can choose this option by filling out Form 6765, Credit for Increasing Research Activities. Attach this form to a business income tax return. 
  • Next, claim the payroll tax credit by filling out Form 8974, Qualified Small Business Payroll Tax Credit for Increasing Research Activities.  Attach this form to a payroll tax return. 

Special note for tax year 2016

Under a special rule for tax-year 2016, a small business that failed to choose this option and still wishes to do so, can still make the election by filing an amended return by December 31, 2017. 

Where to go for more information

The IRS notice offers interim guidance on controlled groups, the definition of gross receipts, and other issues. For more information on the research credit itself, see the instructions to Form 6765.


If you have any questions, feel free to reach out to your BenefitMall Payroll Specialist. 

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