United States: How To Claim Research Payroll Credits

Last Updated: November 14 2017
Article by Robert Swenson

If a business dedicates resources to creating or improving products, processes or software, it may be eligible for substantial federal tax credits for increasing research activities. However, the company must have sufficient federal tax liability to offset the credit in order to receive the benefits. Historically, that meant income tax liability, but qualifying small businesses may now elect to apply their research credit of up to $250,000 in payroll taxes. This article provides details on how to claim a research payroll credit. A Sidebar explains how a business can claim the credit on its 2016 return.

Recent History

The Protecting Americans from Tax Hikes (PATH) Act of 2015 not only made the research credit permanent, but also it created the payroll tax election for the research credit (often referred to as the research and development, R&D or research and experimentation credit). IRS Notice 2017-23 provides interim guidance on claiming research credits against payroll taxes. In addition to clarifying the eligibility requirements and outlining the procedures for making the election, the IRS allows companies that failed to make the payroll tax credit election on their 2016 return to take advantage of the credit by filing an amended return on or before December 31, 2017.

Is Your Business Eligible?

Research payroll tax credits are intended to provide relief to smaller businesses, particularly startups that invest heavily in research and development, but have little or no income tax liability. Although unused credits may be carried forward up to 20 years, payroll tax credits allow these businesses to enjoy the benefits of research credits when they need them most, rather than wait until they begin to generate taxable income.

The PATH Act makes payroll tax credits available to qualified small businesses, which are defined as those with less than $5 million in gross receipts in the current taxable year and no gross receipts for any taxable year preceding the five-year period ending with the current taxable year. For example, a business making the payroll tax credit election for 2017 must not have had any gross receipts before 2013.

For the purposes of determining whether a corporation (including an S corporation) or partnership (including a limited liability company taxed as a partnership) is a qualified small business, Notice 2017-23 clarifies that gross receipts include:

  • Total sales, net of returns and allowances;
  • All amounts received for services; and
  • Income from investments and other outside sources.

For businesses other than corporations and partnerships, gross receipts include all of a person's aggregate gross receipts from all trades or businesses. The IRS does not establish a de minimis test for gross receipts. Therefore, unless the IRS provides additional guidance, a business with minimal gross receipts prior to the five-year period is ineligible. The IRS also requires members of a controlled group to aggregate their gross receipts for purposes of the $5 million threshold.

How to Claim Payroll Tax Credits

To take advantage of payroll tax credits, you must make the election by filing Form 6765, Credit for Increasing Research Activities, with your business income tax returns. You may elect to apply some or all of your research credit against the employer portion of Social Security taxes. After you make the election, you may use your research credit to offset payroll taxes quarterly, starting with the first calendar quarter that begins after you file your federal income tax return. To claim the credit, you must file Form 8974, Qualified Small Business Payroll Tax Credit for Increasing Research Activities, and Form 941, Employer's Quarterly Federal Tax Return, for that quarter. The maximum payroll tax credit is $250,000 per year (with special rules for allocating that amount among members of a controlled group). In addition, you may not make a payroll tax credit election in more than five tax years. To the extent that your credit exceeds your Social Security tax liability in a given calendar quarter, you may carry the excess forward and use it as a credit against Social Security tax in the succeeding calendar quarter (subject to the annual five-year limits).

Stay Tuned

The payroll tax credit is a valuable tax break for businesses that would not benefit currently from the research credit. The IRS may provide additional guidance that affects your eligibility for the credit, so be sure to monitor for future updates on the subject.

Sidebar: Not Too Late for 2016

It is not too late for your business to make a payroll tax credit election on its 2016 return. IRS Notice 2017-23 offers relief to qualified small businesses that filed their 2016 returns on time but did not make the election, provided they make the election on an amended return filed on or before December 31, 2017. To qualify for the extension, your business must include Form 6765, Credit for Increasing Research Activities, with its amended return and indicate at the top of the form that it is filed pursuant to Notice 2017-23. You may also attach a statement to Form 6765 stating that the form is filed according to Notice 2017-23. For Illinois taxpayers, the state research and development credit has been retroactively restored for 2016 with the new Illinois budget passed in July. If you have previously filed your 2016 tax return and did not claim the research and development credit, then you can do so on an amended return.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Robert Swenson
Similar Articles
Relevancy Powered by MondaqAI
Ostrow Reisin Berk & Abrams
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Ostrow Reisin Berk & Abrams
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions