Specialty Tax Spotlight – Payroll Tax Offset

Specialty Tax Spotlight

In this episode of Weaver: Beyond the Numbers, Specialty Tax Spotlight, Sean Muller, Ryan Coleman, and Nancy Imholte delve into a game-changing provision for startups — the payroll tax offset under Section 41. Initially intended for qualified small businesses, this tax lever allows eligible companies to apply a part of their research & development (R&D) tax credit towards their payroll tax liability rather than their income tax, offering an immediate cash flow boost, especially for ones in a loss position.

Stipulations and Regulations

To be eligible for the payroll tax offset, a business must adhere to specific criteria. It must not have acquired gross receipts in five years prior to the current tax year, its gross receipts in the current tax year should not surpass five million and it can’t have applied this offset for over five years. Furthermore, this type of tax offset isn’t just a one-time deal. If the qualifications are met, a business can implement this offset for up to five years.

Excess Credits and Split Use

In situations where a company doesn’t generate enough payroll taxes to use up the full credit, the surplus credit is carried forward. A unique aspect of this provision is that it allows companies to divide the utilization of the credit across income tax and payroll tax. A business can choose to apply a portion — up to $500,000 — of the credit towards their payroll tax and use the remaining on income tax offset or as a carry-forward for a future date.

Claiming the Offset

Unfortunately, businesses that weren’t aware of this provision earlier cannot amend their previous returns to apply the offset. Therefore, it is crucial for firms to evaluate their qualifications for the payroll tax offset with their tax consultant prior to filing the return, as this offset can only be claimed on a timely filed original return along with extensions.

For more information on payroll tax credits, contact us. We’re here to help.

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