Understanding Section 41: The Research and Development (R&D) Tax Credit
The U.S. government offers the Research and Development (R&D) Tax Credit under Section 41 of the Internal Revenue Code (IRC)
June 26, 2023
Regardless of your business type - startup or seasoned - you may meet the eligibility requirements to benefit from tax credits which can be used to offset your federal income tax liability or payroll tax liability.
In this post, we cover the three forms required by the IRS to claim the R&D credit as a payroll tax offset:
If you meet the eligibility requirements established by the IRS Four-Part Test, filling out Form 6765 can establish your R&D credit and should be filed with your company’s income tax return. Composed of four main sections, this form is specific to understanding the nature of your business in order to qualify research expenses and can help you save money at the end of the tax year.
Rebate can help you navigate the form’s elections (ie: payroll tax credit) and what is best for your company’s needs. You can begin to include R&D tax credit in your budgeting plan to keep improving your business activities.
Business owners use IRS Form 8974 to determine the amount of qualified small business payroll tax credit for increasing research activities they can claim on their employment tax returns.
According to the IRS, If you made an election on your income tax return to claim “the qualified small business payroll tax credit for increasing research activities” against your payroll taxes, you need to file Form 8974 and attach it to Form 941 (Employer’s Quarterly Federal Tax Return), 943 (Employer’s Annual Federal Tax Return for Agricultural Employees), or 944 (Employer’s ANNUAL Federal Tax Return).
The payroll tax credit must be elected on an original income tax return that is timely filed (including extensions) and also elected on Form 6765, Credit for Increasing Research Activities.
Note: You need to file the income tax return making the election to claim the payroll tax credit on Form 6765 (step 1), before you can file Form 8974 (step 2) and claim the qualified small business payroll tax credit for increasing research activities against your payroll taxes on Form 941, 943, or 944 (step 3).
About Form 941, Employer’s Quarterly Federal Tax Return
The IRS Form 941 is a two-page form with a lot of information packed in. Most businesses with employees have to file on a quarterly basis to report withheld income taxes from their employees’ wages as well as the employer’s and employees’ shares of Social Security and Medicare taxes, also known together as FICA taxes.
The quarterly deadline schedule is as follows:
Q1- April 30 to cover wages paid in January, February, March
Q2 - July 31 to cover wages paid in April, May, June
Q3 - Oct 31 to cover wages paid in July, August, September
Q4 - January 31 to cover wages paid in October, November, December
If you’re familiar with filling out Form 941, you may have breezed over Line 11, which is for qualified small-business payroll tax credit for increasing research activities. This is where your completed Form 8794 plays it part! On line 12, you’ll subtract line 11 (the determined credit amount) for the total thus far, in order to calculate your total taxes after adjustments and credits. And voila! You’ve just offset your tax bill with your earned tax credit.
Even if you are filling out Form 941 for the first time, don’t skip over Line 11. Work with us to determine if this line item applies to you and your business.
You may be thinking, “Hmm, that’s a lot of forms. So, when exactly do I need to file my R&D credit?”
To first establish your R&D credit, file the credit on Form 6765 which is filed with your company’s income tax return. Once you’ve filed Form 6765, you will establish the credit available for payroll taxes by filing Form 8974 and Form 941.
Rebate is here to help take the guessing game out of federal tax incentives and help you get the money back that you deserve. We spend the time necessary to understand your business, so you can spend less time deciphering the terminology.