How Can Small Businesses Benefit from the Inflation Reduction Act?
With the passage of the Inflation Reduction Act, the maximum R&D Tax Credit that can be applied against payroll taxes has been doubled for tax years beginning after December 31, 2022. Eligible small businesses can now reduce payroll taxes by up to $500,000 annually up from the prior limit of $250,000. Additionally, the credit can now apply to the Medicare portion of taxes (previously, it only applied to the Social Security portion of payroll tax). Taxpayers that have more credit than liability can carry forward unused amounts.
Who Qualifies?
Eligible small businesses are defined as having less than $5 million in revenue AND revenue for less than five years, In addition to the Payroll Tax Credit offset, the Inflation Reduction Act will also create manufacturing jobs and provide protections for small businesses.
Qualified Research Defined
Qualified research defined
For purposes of 26 U.S. Code § 41 – Credit for increasing research activities Subpart D
(1)In general-The term “qualified research” means research—
(A)with respect to which expenditures may be treated as specified research or experimental expenditures under section 174,
(B)which is undertaken for the purpose of discovering information—
(i)which is technological in nature, and
(ii) the application of which is intended to be useful in the development of a new or improved business component of the taxpayer, and
(C) substantially all of the activities of which constitute elements of a process of experimentation for a purpose described in paragraph (3).
Such term does not include any activity described in paragraph (4).
(2) Tests to be applied separately to each business component For purposes of this subsection—
(A) In general
Paragraph (1) shall be applied separately with respect to each business component of the taxpayer.
(B) Business component defined The term “business component” means any product, process, computer software, technique, formula, or invention which is to be—
(i) held for sale, lease, or license, or
(ii) used by the taxpayer in a trade or business of the taxpayer.
(C) Special rule for production processes
Any plant process, machinery, or technique for commercial production of a business component shall be treated as a separate business component (and not as part of the business component being produced).
(3)Purposes for which research may qualify for credit For purposes of paragraph (1)(C)—
(A)In general Research shall be treated as conducted for a purpose described in this paragraph if it relates to—
(i) a new or improved function,
(ii) performance, or
(iii) reliability or quality.
(B)Certain purposes not qualified
Research shall in no event be treated as conducted for a purpose described in this paragraph if it relates to style, taste, cosmetic, or seasonal design factors.
(4)Activities for which credit not allowed The term “qualified research” shall not include any of the following:
(A)Research after commercial production
Any research conducted after the beginning of commercial production of the business component.
(B)Adaptation of existing business components
Any research related to the adaptation of an existing business component to a particular customer’s requirement or need.
(C)Duplication of existing business component
Any research related to the reproduction of an existing business component (in whole or in part) from a physical examination of the business component itself or from plans, blueprints, detailed specifications, or publicly available information with respect to such business component.
(D)Surveys, studies, etc.
Any—
(i)efficiency survey,
(ii)activity relating to management function or technique,
(iii)market research, testing, or development (including advertising or promotions),
(iv)routine data collection, or
(v) routine or ordinary testing or inspection for quality control.
(E)Computer software Except to the extent provided in regulations, any research with respect to computer software which is developed by (or for the benefit of) the taxpayer primarily for internal use by the taxpayer, other than for use in—
(i) an activity which constitutes qualified research (determined with regard to this subparagraph), or
(ii) a production process with respect to which the requirements of paragraph (1) are met.
Any research conducted outside the United States, the Commonwealth of Puerto Rico, or any possession of the United States.
Any research in the social sciences, arts, or humanities.
Any research to the extent funded by any grant, contract, or otherwise by another person (or governmental entity)..
Interested in learning more?
Schedule a call with Darin today!