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:

  • A PEO for payroll services

    The IRS created a voluntary certification program for PEOs and provided guidance stating that once certified, PEOs may process the payroll offset claims for their clients. On June 1, 2017, the IRS issued certification notices to 84 organizations that applied for certified-PEO status. It’s still unclear which organizations were certified, but granting PEO certification eliminates one administrative hurdle from realizing the payroll offset benefit. A full list of the certified PEOs will be available on IRS.gov, according to an IRS statement.

    Also noteworthy: While PEO certification is referenced on the forms required for claiming the payroll offset, IRS guidance to date hasn’t definitively required that PEOs be certified to claim the credit for their clients. In fact, the most recent payroll offset guidance (Notice 2017-23) references instances where the employee identification number (EIN) of the taxpayer that elected the payroll offset on the income tax return differs from the EIN of the taxpayer that filed the payroll tax return (PEOs that file payroll tax returns on clients’ behalf, for example).

    This leads us to believe a noncertified PEO may file for the payroll offset on a client's behalf when filing the client’s payroll tax return. In this instance, the aggregate filer must complete and submit Form 8974 for clients claiming the credit and attach that to the payroll tax return.

    Additionally, many PEOs have stated they’re uncertain when they’ll have the technical capability to process the payroll offset for their clients. As a result, clients of those PEOs may be unable to include the payroll offset into the second quarter payroll tax returns that are due in July.

    However, in the instance that a payroll offset isn’t processed, the PEOs are allowed to amend previously filed 941 submissions. The PEO would need to file Form 941X and include the updated amounts from Form 8974.

  • A non-PEO payroll provider

    Providers that perform payroll services in a non-PEO capacity don’t have the same certification issues as PEOs. These payroll providers should be allowed to integrate the payroll offset into their clients’ payroll returns due in July. Confirm with your provider that they’re technically capable of processing these claims.

If you extended in the first quarter and haven’t yet filed your 2016 tax return.

Taxpayers using PEOs that have filed an extension for their 2016 tax returns should consider the above scenarios for PEO certification before filing their income tax returns.

The date the income tax return is filed determines which quarter of payroll tax can be offset. As a result, the taxpayer could lose any credits it could have used if the income tax return is filed and the PEO is still incapable of processing the offset.

Taxpayers utilizing a non-PEO payroll provider should be able to claim the offset once the income tax returns are filed.

IRS Guidance Is Expected

PEOs are waiting for the IRS to provide additional clarification and certification on the PEO issue. In the meantime, a PEO can help taxpayers claiming the credit by manually completing and submitting Form 8974 and attaching it with the Form 941 Payroll Tax Return. However, many PEOs might not be willing to pursue this option because of the additional effort involved. The IRS also may be considering issuance of a formal response to address noncertified PEOs.

Questions to Ask

The following questions are important to ask because you could lose credits if the PEO chooses not to amend a previously filed payroll tax filing that doesn’t include the offset. Note that a company can amend the payroll tax return without the assistance of the payroll provider; however, a company that chooses to do this would be taking on significant risk for any inaccuracies.

PEO or Payroll Tax Services Provider Questions

  • What’s your process for applying for this benefit?
  • If my accounting firm helps me calculate my R&D credit, what information do you need from me?
  • How do I get my refund? When does that occur?
  • Can I reduce payroll deposits as I go or do I wait until the end of the quarter for a refund?
  • What happens if I pay you less and carry a balance?
  • Will you amend my Form 941 payroll tax return if necessary?

PEO-Specific Questions

  • Are you a certified PEO? Did you apply for certification; if so, when did you apply?
  • Will you process the R&D offset if you aren’t certified?

We're Here to Help

The above issues aside, it’s important to remember that the statutory basis for the payroll offset benefit is entirely valid. If you have questions about calculating and documenting the credit generated, corresponding with your payroll provider, or preparing the payroll returns yourself, contact your Moss Adams professional.