Biden Signs Inflation Reduction Act into Law
Increase in Qualified Small Business Payroll Tax Credit for Increasing Research Activities
The Inflation Reduction Act is now signed into law – and it’s big news for some qualified small businesses. The bill increases the amount of the research tax credit that may be applied against the payroll tax liabilities of certain small businesses.
A little background
Before the Inflation Reduction Act of 2022, a “qualified small business” (QSB) with qualifying research expenses could elect to claim up to $250,000 of its credit for increasing research activities as a payroll tax credit against the employer’s share of Social Security tax.
What’s a QSB?
A QSB is one that, in the case of a corporation or partnership, with respect to any tax year, has gross receipts of less than $5 million, and did not have gross receipts for any tax year preceding the five-tax-year period ending with the tax year.
What changed with the new law? And how much is the credit now?
Here’s what changes with the new law. First, a bit about the “why.” Due to concerns that some small businesses may not have a large enough income tax liability to take advantage of the research credit for tax years beginning after December 31, 2022, QSBs may apply an additional $250,000 in qualifying research expenses as a payroll tax credit against the employer share of Medicare – thereby increasing the total potential value to $500,000.
Important to note: The credit cannot exceed the tax imposed for any calendar quarter, with unused amounts of the credit carried forward.
This applies to tax years beginning after December 31, 2022.
The bottom line
The reduction in payroll taxes for small employers immediately reduces expenses for small businesses that are performing qualifying research and experimentation.
If you’d like to discuss whether your organization may qualify for other tax credits and would like to talk to a top tax pro, contact us for a free consultation. As always, the Barnes Dennig team is here to help you build a brighter future.