Inflation Reduction Act Expands R&D Payroll Tax Credit

For all companies, the maximum fixed-base percentage amount is 16% (Sec. 41(c)(3)(C)). See Joint Committee on Taxation, Estimated Budget Effects of Division Q of Amendment #2 to the Senate Amendment to H.R. 2029 (Rules Committee Print ), The “Protecting Americans From Tax Hikes Act of 2015” (JCX ) (Dec. 16, 2015), estimating a revenue loss of over $113 billion over the 2016—2025 period from the changes made by the PATH Act to Sec. 41. For more information, see the instructions for Form 941-X, 943-X, or 944-X. For instance, a logistics company developing an algorithm to optimize delivery routes would likely qualify.

Decoding the Four-Part IRS Test for R&D Activities

• Enter the amount from line 36 on the applicable line of Form 8974, Part 1, column (e), Qualified Small Business Payroll Tax Credit for Increasing Research Activities.
• While many large businesses take advantage of this credit, smaller businesses often forego extensive tax savings because they aren’t aware they qualify.
• In January 2026, you prepare your 2025 Form 943 and Form 8974 to take the payroll credit.
• Specifically, the Research and Development tax credit is a federal credit that is available to businesses that have invested funds into innovation, research, development and experimentation.
• That means companies can reduce the cash they spend on employer payroll taxes, freeing up funds for growth and innovation.

That’s because, if you take the full credit, you have to reduce your otherwise allowable Sec. 174 deduction for qualified research expenses by the amount of the credit. You can also file an amended return to retroactively claim R&D expenses incurred in the previous three years. Additionally, any credit amounts exceeding the Social Security and Medicare taxes due in each quarter will carry forward to successive quarters until exhausted.

• It’s more efficient than spreadsheets and has less distracting functionality than more complicated platforms.
• The R&D tax credit payroll tax offset offers a unique advantage allowing businesses to derive immediate benefits.
• Please consult an experienced tax professional to discuss the application of this information to your particular tax situation or to explore potential exceptions to this discussion that may apply.
• For more details, see the instructions for Schedule K-1 (Form 1041), box 13.
• Some companies with cyclical revenues or early-stage development phases benefit especially from this long carryforward window, aligning tax benefits with growth cycles.
• If you received a Section 3121(q) Notice and Demand for tax due on unreported tips (Letter 3263 or Letter 4520) during the quarter, you report the amount for the employer’s share of social security tax and Medicare tax on Form 941, line 5f.

Inflation Reduction Act Expands Valuable R&D Payroll Tax Credit

Section G will be optional for all filers for tax years beginning before 2025. If you are filing an amended return, refer to Research Credit Claims on Amended Returns . If you are a member of a controlled group filing separately, enter only the member’s QREs and not the group total QREs. This amount must be computed and shown on the required group credit attachment (see instructions for this attachment under Item B—Controlled Group/Common Control , earlier). Enter the qualified organization base period amount based on minimum basic research amounts plus maintenance-of-effort amounts for the 3 preceding tax years.

Research With Respect to Software

The R&D credit must be calculated and shown on a taxpayer’s federal income what is r&d tax credit tax return with the portion of the credit applied to offset payroll taxes identified and elected when the return is filed. This portion of the qualified small business payroll tax credit for increasing research activities is used against the employer’s share of Medicare tax on wages paid to your employees. Because the amount entered on Form 8974, line 14, included Medicare tax for your clients’ employees, you must make an adjustment to the amount reported on Form 8974, line 15. Taxpayers applying their R&D credit against payroll taxes must make the necessary election on a Form 6765, Credit for Increasing Research Activities, which must be included with their timely filed income tax returns. You can apply the credits to offset payroll taxes no sooner than the first quarter after you file the tax return where you make the payroll tax election. The credit can’t exceed the amount of tax imposed for any calendar quarter; unused amounts can be carried forward.

• — Pinky Shodhan, CPA, J.D., LL.M., MBA; Clay Chaberski, CPA; Nick Perry, E.A.; Monica Bambury, J.D., LL.M.; and Kevin Benton, E.A., are with Grant Thornton LLP.
• Gross receipts for any tax year must be reduced by returns and allowances made during the year.
• A healthcare provider creating a custom patient management system would also meet the requirements for R&D credits under the expanded guidelines.
• Identify and gather support for the credit to which you’re legally entitled.

To help businesses, governments offer research and development tax credits — special deductions for research and innovation to offset income tax liabilities. For example, France offers a 30% tax credit (aka a discount) on R&D expenses up to €100 million. And until April 2024, the UK had a 186% super-deduction for qualified small businesses (now restored to 100%). The changes listed in TJCA did not have a material impact on the section 41 credit. However, the proposed American Innovation and Jobs Act would expand this section as it pertains to qualified small businesses.

Incorrect or Incomplete Filings

The Inflation Reduction Act doubles the amount a qualified business can potentially claim as an R&D tax credit to offset its payroll tax for tax years starting after 2022—to a maximum of $2.5 million over five years. The RRC, part of the R&D tax credit since its inception, rewards incremental increases in R&D spending. It involves a complex calculation requiring historical data on QREs and gross receipts, potentially extending back several decades. As such, it’s generally best for larger, more established companies with consistent R&D activities, comprehensive historical records, and the ability to handle the administrative costs. The RRC provides a credit of 20% of current-year QREs that exceed the base amount, calculated by multiplying the fixed-base percentage by the average annual gross receipts of the four preceding tax years.

Common Misconceptions about the R&D Tax Credit—and Whether You Qualify

It offers a dollar-for-dollar reduction in tax liability, lowering the company’s effective tax rate and improving its financial health. The Regular Credit method calculates theR&D tax credit by comparing your current year’s qualified research expenses(QREs) to a historical base amount, which is a percentage of your average grossreceipts over the past 4 years. The credit is 20% of the difference betweencurrent-year QREs and the base amount. This method can lead to a larger creditif your R&D spending has increased, but it’s more complex and requiresdetailed historical data.

Eligible Businesses

KBKG has offices across the U.S., so you can get help with R&D tax credits in Los Angeles or the East Coast. We offer https://www.bookstime.com/ various services and software to CPAs and other businesses to help them understand which tax programs benefit clients most. Our services complement traditional tax and accounting teams by offering knowledge and expertise alongside your existing team as we work together to achieve more excellent value and savings. While many large businesses take advantage of this credit, smaller businesses often forego extensive tax savings because they aren’t aware they qualify.

Don’t you have to achieve a major scientific breakthrough or do revolutionary or pioneering research to qualify?

For purposes of Step 3, your income tax return was filed on April 15, 2026. In Step 4, for the quarters that began after the date determined earlier in Step 3 (third and fourth quarters), enter in column (d) any amounts in column (c) not previously used ($50,000 and $65,000). You add the amounts in column (d) and you enter the total, $170,000, on Form 8974, line 11. Your total payroll tax credit for 2026 is $170,000 ($55,000 carried forward from your 2025 Form 8974 and $115,000 from your 2026 Form 8974).

Annual Form 943 or 944 Filers

• Chances are, there are also state R&D tax credits available where you operate (four out of five states have them), and most adhere closely to the federal guidelines.
• You elected to take $100,000 as a qualified small business payroll tax credit for increasing research activities when you filed your 2024 income tax return on March 17, 2025.
• The credit may also be claimed by amending a previously-filed return on or before the statute of limitations date to report credits related to expenses incurred during that period.
• For example, France offers a 30% tax credit (aka a discount) on R&D expenses up to €100 million.
• Meanwhile, in California, many accounting services providers, apparel, automotive, beverage, and construction companies have also benefited.

While the credit used to offset payroll taxes is based on eligible R&D expenses, it only applies to costs incurred Statement of Comprehensive Income after the bill was signed into law. The maximum benefit an eligible company can claim against payroll taxes each year under the PATH Act is $250,000 annually until December 31, 2022, after that the Inflation Reduction Act increased the election to $500,000. You can claim R&D tax credits retroactively by filing amended returns for open tax years, generally up to three years prior, with possible extensions when losses occurred. This opportunity lets you recover missed credits from past qualified expenditures, improving cash flow and funding further innovation. However, retroactive claims require thorough documentation to withstand IRS scrutiny, so maintaining precise records is vital to substantiating eligibility and expediting the refund or credit application process.