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Client Alert:Monetizing Your Federal R&D Tax Credit Carryforwards

Most technology companies build up substantial research and development (R&D) tax credit carryforwards as they invest heavily in developing their concept or product. But until they are profitable and have fully utilized past net operating losses, there is generally not a monetary benefit to these credits. This has now changed.

The recently passed Protecting Americans from Tax Hikes Act of 2015 (PATH Act) allows qualified small businesses (QSB) to elect to claim a portion of their research credit against their employer FICA tax liability, rather than against their income tax liability. This applies for years that begin after December 31, 2015.

The IRS will soon release guidance as to how this provision will be implemented. Here is a general overview of the provision:

A QSB has:

  • Gross receipts in the current tax year of less than $5 million
  • No gross receipts for any tax year before the five-tax year period ending with the current tax year
    (ie. the QSB must be less than five years old or, if older, have no gross receipts in any period before the five-year lookback period).

A QSB may then apply against their FICA tax liability the lesser of:

  • $250,000
  • The research credit for the tax year 
  • The amount of the business credit carryforward from the tax year, in the case of a QSB other than a partnership or S corporation.

An eligible QSB can make an annual election specifying the amount of its research credit (per the above limitation) that may be used as a payroll tax credit. This can be done on an originally filed tax return. Then, the payroll tax portion of the research credit is allowed as a credit against the QSB's employer FICA tax liability for the first calendar quarter beginning after the date on which the QSB files its income tax return.

The credit may not exceed the employer FICA tax liability for a calendar quarter on the wages paid with respect to all employees of the QSB. If the payroll tax portion of the credit exceeds the QSB’s employer FICA tax liability for a calendar quarter, the excess is allowed as a credit against the employer FICA liability for the following calendar quarter.

For more information about this topic, please contact Joseph F. Burnett, CPA, Tax Senior Manager at 617-428-5494 or jburnett@wolfandco.com.