IRS Guidance Says R&D Payroll Credit Doubled to $500,000

Summary

Since 2016, companies could claim up an R&D Tax Credit of up to $250,000 of qualified expenses to be applied toward payroll taxes. But the IRS just explained in its guidance for the 2023 Tax Year that:

“Provision 13902 of the IRA of 2022 increased the maximum amount of payroll tax research credit that a QSB can elect to apply against payroll tax liability from $250,000 to $500,000 for tax years beginning after December 31, 2022.”

In (slightly) plainer English, that means that starting in the 2023 tax year, a qualified small business may elect to claim up to $500,000 of its credit for increasing research activities as a payroll tax credit. Previously, taxpayers could only claim up to $250,000.

Beginning with this year, the payroll tax credit must first be used to reduce the employer share of social security tax (up to $250,000 per quarter) after which the credit must be used to reduce the employer share of Medicare tax for the quarter. Any remaining credit, after reducing the employer share of social security tax and the employer share of Medicare tax, is then carried forward to the next quarter.

The takeaway for innovative companies: the R&D Tax Credit has doubled in value as an offset for payroll taxes. Get in touch with us if you’d like to learn more about what that means for your business in 2024 and beyond.