The IRS has issued guidance (Notice 2017-23) for the new provision allowing eligible taxpayers to claim up to $250,000 of R&D credit against payroll taxes. The Protecting Americans from Tax Hikes Act of 2015 (PATH Act) amended Section 41(h) to provide that for tax years beginning in 2016 or later, eligible taxpayers with $5 million or less in gross receipts and no gross receipts for any tax years preceding the last five years, including the year of the claim, can elect to apply a portion of the R&D credit against the FICA tax liability. The notice includes guidance on qualifying taxpayers, the definition and aggregation rules for gross receipts, retroactive elections for 2016 and the credit carryforward.
A qualified taxpayer can be any business entity other than a tax-exempt organization that meets the gross receipts test, including C corporations, S corporations, partnership and sole-proprietorships. Members of a controlled group as defined in Treas. Reg. Sec. 1.41-6(a)(3)(ii) are treated as a single taxpayer for purposes of the gross receipts test, and individuals must take into account all gross receipts from all trades or businesses. The IRS defined the term "gross receipts" in reference to Section 448(c)(3) without regard to Section 448(c)(3)(A)) or Treas. Reg. Secs. 1.448-1T(f)(2)(iii) and (iv).
This means the definition of gross receipts under Section 41(c)(7) and Treas. Reg. Sec. 1.41-3(c) does not apply, so taxpayers cannot rely on the de minimis rule that excludes any gross receipts from years before the first year the taxpayer achieves $25,000 in gross receipts. This also indicates that the definition of gross receipts is limited to sales less returns and allowances as found in Section 448(c)(3)(C). This may affect start-up companies that have investment income but not income from the sale of their product or service. Also, an example in the notice makes clear that a taxpayer can still qualify if it had more than $5 million in gross receipts in a prior year but meets the current year gross receipts test and the five-taxable-years period test.
If the elected payroll tax credit amount exceeds the lessor of the taxpayers FICA payroll tax liability or $250,000, the excess is carried over to the succeeding calendar quarter(s). Generally, the election to use the research credit against the payroll tax must be made on a timely filed return, but the notice provides relief for taxpayers that have filed their income tax returns without making the election. The relief allows taxpayers to amend their return on or before Dec. 31, 2017. Each member of a controlled group can make the election to use the research credit against the payroll tax at the entity level. If a member of the group does not make the election, its share of the overall elected amount cannot be allocated to the other group members that made the election.
Taxpayers have until July 17, 2017, to provide comments on this notice.
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