Navigate uncertainty surrounding the new R&D credit payroll offset

A number of companies have qualified for the R&D tax credit to offset payroll tax. With the first benefits coming available in July 2017, companies that are anticipating the boost in cash flow are also anticipating uncertainty.

As a new opportunity, the payroll offset provisions require a high level of coordination between taxpayers, payroll providers or professional employer organizations (PEOs), and the IRS. Due to unresolved questions on process, there’s some confusion for qualifying taxpayers regarding how the new provisions will be effectively executed and provide taxpayers the intended benefit. Before companies receive cash, the IRS and key players such as payroll tax providers or PEOs are working to finalize administrative processes and procedures.

Who qualifies

Beginning with second quarter payroll filings due in July, qualifying companies that claimed an R&D credit on their timely filed tax returns filed on or prior to March, 31, 2017, are able to use the R&D tax credit to offset payroll tax. The new payroll tax offset is available only to companies that have:

• Qualifying research activities and expenditures
• Gross receipts for five years or less
• Less than $5 million in gross receipts in the current year and for each subsequent year the credit is elected

Eligible taxpayers may utilize the payroll offset option to claim up to $250,000 per year, for up to five years. The question for qualifying taxpayers isn’t if, but when they can receive the R&D credit benefit to which they’re entitled.

With a number of moving pieces, it’s important to understand how to navigate those pieces to utilize the tax savings you’re eligible for. Many qualifying companies have received conflicting information or simply don’t know where to go from here. If you’ve claimed the credit or are interested in claiming it in the near future, here’s a quick rundown of what you can expect in terms of timing and challenges.

Scenarios

If you filed your R&D credit and payroll offset election with your 2016 tax return on or before March 31, 2017, to offset second quarter payroll liabilities and you utilize: