The IRS has issued guidance (Notice
2017-23) for the new provision allowing eligible taxpayers to
claim up to $250,000 of R&D credit against payroll taxes. The
Protecting Americans from Tax Hikes Act of 2015 (PATH Act) amended
Section 41(h) to provide that for tax years beginning in 2016 or
later, eligible taxpayers with $5 million or less in gross receipts
and no gross receipts for any tax years preceding the last five
years, including the year of the claim, can elect to apply a
portion of the R&D credit against the FICA tax liability. The
notice includes guidance on qualifying taxpayers, the definition
and aggregation rules for gross receipts, retroactive elections for
2016 and the credit carryforward.
A qualified taxpayer can be any business entity other than a
tax-exempt organization that meets the gross receipts test,
including C corporations, S corporations, partnership and
sole-proprietorships. Members of a controlled group as defined in
Treas. Reg. Sec. 1.41-6(a)(3)(ii) are treated as a single taxpayer
for purposes of the gross receipts test, and individuals must take
into account all gross receipts from all trades or businesses. The
IRS defined the term "gross receipts" in reference to
Section 448(c)(3) without regard to Section 448(c)(3)(A)) or Treas.
Reg. Secs. 1.448-1T(f)(2)(iii) and (iv).
This means the definition of gross receipts under Section
41(c)(7) and Treas. Reg. Sec. 1.41-3(c) does not apply, so
taxpayers cannot rely on the de minimis rule that excludes
any gross receipts from years before the first year the taxpayer
achieves $25,000 in gross receipts. This also indicates that the
definition of gross receipts is limited to sales less returns and
allowances as found in Section 448(c)(3)(C). This may affect
start-up companies that have investment income but not income from
the sale of their product or service. Also, an example in the
notice makes clear that a taxpayer can still qualify if it had more
than $5 million in gross receipts in a prior year but meets the
current year gross receipts test and the five-taxable-years period
If the elected payroll tax credit amount exceeds the lessor of
the taxpayers FICA payroll tax liability or $250,000, the excess is
carried over to the succeeding calendar quarter(s). Generally, the
election to use the research credit against the payroll tax must be
made on a timely filed return, but the notice provides relief for
taxpayers that have filed their income tax returns without making
the election. The relief allows taxpayers to amend their return on
or before Dec. 31, 2017. Each member of a controlled group can make
the election to use the research credit against the payroll tax at
the entity level. If a member of the group does not make the
election, its share of the overall elected amount cannot be
allocated to the other group members that made the election.
Taxpayers have until July 17, 2017, to provide comments on this
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guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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