As businesses continue to adjust to the COVID-19 crisis, many small businesses and start-up companies are becoming significantly strapped for cash. In response to the need for businesses to both maintain cash flow and continue paying employees to remain operational, the federal government has enacted the Families First Coronavirus Response Act ("FFCRA") and the Coronavirus Aid, Relief, and Economic Security Act ("CARES"), respectively. Among various other mechanisms for aid, the Acts include Employee Retention Credits, which are refundable tax credits that offset FICA taxes paid by employers during this crisis. The dollar amount of the employee retention credits that a business qualifies to receive is determined based on the size of a business, the number of employees, and various other factors, with a maximum credit of $5,000 per employee. One key benefit of these credits is that any excess portion of such credits can be refunded to the taxpayer in the current tax year. Thus, if businesses can minimize the amount of payroll taxes offset by the employee retention credits, and instead offset these taxes using a different provision, they can both decrease their FICA tax liability and increase cash flow into the business. So, what other provisions allow for a tax credit to offset payroll tax liability?
Enter the Research and Development Credit. As of January 1, 2016, qualified small businesses can elect to apply a portion of their research and development credits to offset the payroll taxes required to be paid on wage payments made to employees. A qualified small business is a taxpayer with less than $5 million dollars in gross receipts in the year of the election and also does not have gross receipts in any tax year preceding the five-year tax period ending in the year of making the qualified small business election. The payroll tax credit portion of the R&D Credit is subject to certain limitations, the most significant being that the credit cannot exceed $250,000 (the total R&D Credit amount is not limited). It is also important to note, if a taxpayer claims the payroll tax credit, they will not lose the deductions allowed for payroll taxes paid in their business returns for the tax year.
Thus, practically speaking, a small business that qualifies for both employee retention credits and payroll tax credits, would first apply the payroll tax credits (derived from their R&D credit) to the outstanding FICA taxes due. It would then apply the employee retention credits to cover any excess FICA taxes not covered by the payroll tax credits, and would have the remainder of the employee retention credit refunded, achieving additional cash flow, the satisfaction of the payroll tax liability, and the preservation of their valuable deductions for payroll taxes paid.
Every business is different, and the benefits a business can receive from retention and R&D credits will vary depending on the financial and economic position of a particular business, as well as the availability of these credits to a specific company. Not sure whether this is a cash flow strategy that could work for your business? Interested in learning more about the benefits of claiming research and development for your particular business? We are here to support your business needs and would love to hear from you! Please contact either Ross Alessandro or Matt Werner with any questions.
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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.