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TAX MATTERS

6.2% employer portion of the Social is carried back one tax year and carried
Security payroll tax liability. The Infla- forward 20 tax years, the PATH Act
tion Reduction Act now also enables enabled QSBs to apply credits in ex-
taxpayers to use up to $250,000 cess of income taxes, up to a specified
against the 1.45% employer portion cap, to Federal Insurance Contribu-
of the Medicare payroll tax liability. tions Act (FICA) taxes. A corporation
This item highlights the opportunity, or partnership meets the definition of
procedural considerations, potential a QSB if (1) the gross receipts of the
pitfalls, and observations. Note that entity for the tax year are less than $5
the election must be made on an million and (2) the entity did not have
originally filed return. gross receipts for any tax year preced-
ing the five-tax-year period ending
THE RESEARCH CREDIT AND QSBs with the current tax year. In addition,
Sec. 41 allows taxpayers to claim a the election cannot be made if there
credit for increasing research activities. was a payroll tax election in five or
The research credit: In most cases, to qualify for the R&D more prior tax years.
Payroll tax offset credit, activities must meet a four-part
test. Under this test, activities must CLAIMING THE PAYROLL TAX
Qualified small businesses be technological in nature; research OFFSET
without a federal income tax must be intended to develop a new or Notice 2017-23 provides interim
liability can offset their payroll improved business component (i.e., guidance on how QSBs can apply all
tax and see near-term tax product, process, computer software, or part of the R&D credit against their
savings. technique, formula, or invention); payroll tax liability. The notice provides
there must be uncertainty related to guidance on the definition of a QSB
By Pinky Shodhan, CPA, J.D., LL.M.,
the capability or methodology for and whether a business is eligible to
MBA; Clay Chaberski, CPA; Nick
developing the business component or elect to apply all or part of the R&D
Perry, E.A.; Monica Bambury, J.D.,
the design of the business component credit against its payroll tax liability
LL.M.; and Kevin Benton, E.A.
itself; and substantially all the research instead of its income tax liability. The
Signed into law on Aug. 16, 2022, the must constitute elements of a process notice also provides information on
Inflation Reduction Act, P.L. 117- of experimentation. In some situations gross receipts, aggregation rules, and
169, included a package of tax credits where the activity is related to devel- the time and manner for making the
intended to encourage investment in opment of the taxpayer’s internal-use election to claim the payroll tax credit.
domestic energy and innovation. The software, heightened criteria must be As outlined in Notice 2017-23, the
Inflation Reduction Act increased the met in addition to the four-part test. annual election must be made on or
maximum amount that a qualified Also, specific activities are excluded before the due date of the taxpayer’s
small business (QSB) can use from the from the definition of qualified re- income tax return (including exten-
Sec. 41 research credit (R&D credit) search, including research performed sions) on Form 6765, Credit for In-
to offset certain payroll tax liabilities outside the United States or research creasing Research Activities. A taxpayer
from $250,000 to $500,000 for tax funded by another entity. Eligible electing the payroll tax offset must
years beginning after Dec. 31, 2022. qualified research expenditures include complete Section D of the form as
This can be particularly valuable for taxable wages, supplies, computer well as Section A or B, which reflects
startup companies that currently have lease or rental costs (including cloud the R&D credit computed for the tax
net operating losses for federal tax computing), and third-party contractor year. This form must be submitted with
purposes and would like to monetize costs. Taxpayers may also include costs the return and can be revoked only IMAGE BY ILLUSTRATOR DE LA MONDE/GETTY IMAGES
the R&D credit in the near term. for individuals directly supporting or with consent. For partnerships and S
Under the Protecting Americans From directly supervising the performance of corporations, the election is made at
Tax Hikes (PATH) Act of 2015, P.L. qualified research. the entity level. The credit is claimed
114-113, taxpayers were only allowed While the R&D credit is a nonre- against payroll taxes on the taxpayer’s
to use the payroll tax offset against the fundable general business credit, which Form 941, Employer’s Quarterly Federal

32 | Journal of Accountancy January 2023