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Inflation Reduction Act Increases R&D Tax Credit for Small Businesses

August 23, 2022

Attention small businesses…are you up to speed on the Inflation Reduction Act? It increases the Research and Development (R&D) tax credit for tax years after December 31, 2022. Here’s what you need to know.

President Biden signed the Inflation Reduction Act on August 16, 2022, which introduces a number of tax changes, including increasing the research credit available against payroll tax for small businesses. Check out our summary of the changes here: Biden Signs the Inflation Reduction Act: What are the Key Tax Provisions? . The Act doubles the maximum amount per year from the current $250,000 to a new maximum of $500,000. These changes would be effective for tax years beginning after December 31, 2022.

R&D Payroll Credit

Low revenue startup companies that are eligible to claim the R&D payroll credit can realize immediate cash savings with the R&D payroll credit.

To be eligible for the credit, an entity must have qualified research expenses with:

  • Less than $5 million in gross receipts over a five-year period and
  • No gross receipts before the five-year period ending with the tax year.

How does a business apply for the credit?

A taxpayer may make the election for up to five years by specifying the amount on or before the due date (including extensions) of the income tax return for the tax year the credits are generated. The election is made on Form 6765, Credit for Increasing Research Activities, and attached to their business income tax return.

The credit can then be used against the qualified small business’ employment taxes on wages paid for the first calendar quarter after the date the return was filed. Any excess credit not used to offset the eligible payroll tax will be carried forward to the next calendar quarter.

Did Congress Change the new requirements of Section 174?

Unfortunately, this bill contained no deferral or repeal of the TCJA provision that modified Code section 174 requiring US-based R&D expenditures be charged to a capital account and amortized over five tax years, with foreign research amortized over fifteen tax years, beginning January 1, 2022. Though many industry experts are still hopeful for legislative changes this year, there is no guarantee.
For more information on the payroll tax credit or section 174 amortization, do not hesitate to contact any member of our KLR service team for assistance.

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