Thanks to the Protecting Americans from Tax Hikes Act of 2015 (PATH Act), small startup businesses now qualify for the research and development tax credit. Small businesses are those with gross receipts of less than $5 million for the taxable year, and that didn’t have gross receipts for the five preceding years, ending with the current taxable year.
$250,000 credit. The expanded credit applies for taxable years beginning after Dec. 31, 2015. If you qualify, you can claim research and development expenses as a credit against the employer’s share of the Social Security portion of FICA taxes, rather than against your income tax liability. The credit is equal to the least of these amounts:
1. An amount specified by you, up to $250,000
2. The amount of the research credit determined for the taxable year
3. For qualified small businesses other than partnerships or S corps, the amount of the general business credit carryforward from the taxable year.
4. The credit can’t exceed your FICA liability for a calendar quarter, but you can carry forward any excess credit into later quarters. Once made, elections can’t be revoked without IRS consent.
Watch out: If that date is before Dec. 18, 2015, the day the PATH Act was signed into law, the credit won’t apply until those states update their IRC conformity statutes. Finally, some states adopt the federal credit without reference to an IRC date; the credit should apply in those states, as well.