Guidance Issued on Option for Small Business to Apply Research Tax Credit to Payroll Taxes

The Internal Revenue Service recently issued guidance related to options for qualified small businesses claiming the research tax credit. Prior to 2016, the research tax credit could only be used against income tax liability. The Protecting Americans From Tax Hikes (PATH) Act provided that qualified small businesses may elect to apply the tax credit against payroll tax liability.

Qualified businesses have less than $5,000,000 in gross receipts and did not have gross receipts prior to 2012. Such a qualified business can apply up to $250,000 of the research tax credit against the payroll tax liability.

The election is made on Form 6765, which is included with the businesses income tax return, and Form 8974, which is included with the business payroll tax return. For 2016, if a qualified business has already filed its tax return and failed to timely make the election, an amended return may be filed making the election. Such amended return must be filed before December 31, 2017.

For additional information, see Internal Revenue Service, Notice 2017-23, available at https://www.irs.gov/pub/irs-drop/n-17-23.pdf.

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100% Exclusion for Qualified Small Business Stock Held for Five Years

Starting a small business is full of challenges and an entrepreneur will have many concerns, especially with ensuring adequate operating capital and meeting funding requirements. The federal government does recognize the importance of small business and the challenges faced by entrepreneurs, including cash issues, and reacted by making permanent the 100% qualified small business stock (QSBS) exclusion in December of 2015.

Originally, in 1993, Section 1202 of the Internal Revenue Code was enacted, encouraging investment in small business by excluding 50% of capital gains from the sale of QSBS held for 5 years. Over the years, the exclusion changed and evolved until 100% of capital gains from the sale of QSBS held for 5 years was excluded, if the required conditions were met. The 100% exclusion was set to expire at the end of 2015, but the exclusion was made permanent in the Protecting Americans from Tax Hikes (PATH) Act, enacted in December 2015.

The 100% QSBS exclusion, although permanent, is nuanced and the stock itself must be held for five years, be in a C corporation, be in a Corporation with less than $50 million of assets at the time the stock was issued, have acquired the stock at its original issue, and have over 80% of the corporation assets being used in the active conduct of a qualified business during the entire time holding the stock. Active conduct is similarly defined under the tax code, excluding investment vehicles, brokerage services, farming business, and other inactive business. For those looking to utilize the QSBS exclusion or attract new capital from investors under this exclusion, a proper evaluation should be conducted to ensure the stock qualifies.

© 2016 Vandenack Williams LLC
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