Companies that develop new or improved products, processes, or software can:
- Generate up to $250,000 annually until December 31, 2022, after that the Inflation Reduction Act increased the election to $500,000 in R&D credits to use against your payroll tax
- Receive a credit equal to 10% of your eligible R&D spend
- Generate payroll credits for up to five years—for up to $2.5 million in total credits
The additional $250,000 would be used to offset the employer-paid Medicare payroll tax of 1.45% each calendar quarter. The R&D payroll tax credit attributable to the employer-paid Medicare tax must not exceed the tax imposed. Any unused R&D credits will be carried forward and applied to a succeeding calendar quarter as a credit.
Small, midsize, and early-stage businesses are more likely to be able to claim the credit.
Your company may be able to apply the R&D tax credit against payroll tax if the following are true:
- You’ve never had gross receipts or only had them within the last five years
- You have less than $5 million in gross receipts during the current year
- You have qualifying research activities and expenditures that meet the IRC Sec. 41 four-part test
- You have payroll-tax liability