Research Credit
This chapter is an overview (awareness) of what can be a very complex tax credit and generally only includes information related to small businesses. The chapter has also been updated for the Inflation Reduction Act of 2022.
Overview
IRC Sec 41 provides a tax credit for qualified expenditures for businesses that develop, design or improve products, processes, techniques, formulas or software and similar activities.
Credit Methods - There are two methods of determining the credit.
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Regular, and
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Simplified Method (used by most small businesses)
Credit Purpose - The credit is generally based upon increases in research activities and expenditures. Its purpose is to reward businesses that pursue innovation by continually increasing investment. Even so, the simplified method allows taxpayers to claim the research credits even if research costs remain the same or even decline when compared with prior years.
FICA Withholding Election - For small businesses (gross receipts less than $5 Million and no gross receipts for any taxable year before the 5-taxable-year period ending with the taxable year) the credit can be claimed against the employer’s share of the employees’ FICA withholding requirement. The limit is $500,000 ($250,000 before 2023).
Post-2021 Amortization – After 2021 taxpayers cannot deduct qualifying expenses. If they don’t elect to claim the credit, or the expenses don’t qualify for the credit, then the expenses must be amortized over 5 years (15 years for expenditures outside of the U.S).
Related IRC and IRS Publications and Forms
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Form 6765 – Research Credit
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Form 8975 - Qualified Small Business Payroll Tax Credit for Increasing Research Activities
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Form 3800 – General Business Credit
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Instructions for Form 3800, General Business Credit
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IRC Sec 41 - Credit for Increasing Research Activities
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IRC Sec 174 – Amortization of Research Expenditures
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IRC SEC 38 – General Business Credit
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IRC SEC 52(c)(2) – Tax-Exempts Employing Vets
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IRC Sec 3111(f) – Payroll Credit Election