IRS has issued final versions of Form 6765, Credit for Increasing Research Activities, and the instructions for that form. The Form and instructions contain new lines and instructions regarding the following rules that apply to tax years beginning after Dec. 31, 2015: the rules allowing an eligible small business to have the research credit offset alternative minimum tax (AMT) liability; and the rules allowing a qualifying small business to elect to have a portion of the credit be a payroll tax credit.
Background—the research credit, generally. In general, the research credit equals the sum of: (1) 20% of the excess (if any) of the qualified research expenses for the tax year over a base amount (unless the taxpayer elected an alternative simplified research credit); (2) the university basic research credit (i.e., 20% of the basic research payments); and (3) 20% of the taxpayer’s expenditures on qualified energy research undertaken by an energy research consortium. (Code Sec. 41)
The credit is calculated on Form 6765.
Background—research credit of eligible small businesses. For credits determined for tax years that begin after Dec. 31, 2015, eligible small businesses (generally, those with $50 million or less of gross receipts) may claim the credit against their AMT liability. (Code Sec. 38(c)(4)(B)(ii))
Specifically, the provision provides that, in the case of an eligible small business (as defined in Code Sec. 38(c)(5)(C), after application of rules similar to the rules of Code Sec. 38(c)(5)(D)), the research credit determined under Code Sec. 41 is a specified credit. As a specified credit, the research credits of an eligible small business may offset both regular tax and AMT liabilities.
Background—election to have a portion of the credit be a payroll tax credit. For tax years that begin after Dec. 31, 2015, qualifying small businesses (QSBs) may elect to take a portion of the Code Sec. 41 research credit as a qualified small business payroll tax credit against their employer FICA tax liability on Form 941 (Employer’s Quarterly Federal Tax Return). (Code Sec. 41(h)(1))
RIA observation: The election is beneficial for QSBs that have an income tax liability that is less than the calculated research credit, but will have payroll tax liabilities in the tax year after the Code Sec. 41 credit is claimed.
A QSB generally is a corporation or partnership with gross receipts for the current tax year (as defined under Code Sec. 448(c)(3)) of less than $5 million, that did not have gross receipts for any tax year preceding the 5-tax-year-period ending with the current tax year. (Code Sec. 41(h)(3)(A)(i)) Other business entities (such as a sole proprietorship) can be QSBs, but the aggregate gross receipts received from all trades or businesses carried on by the person must be taken into account. (Code Sec. 41(h)(3)(A)(ii)) Tax-exempt organizations that are exempt from income tax under Code Sec. 501 cannot be QSBs. (Code Sec. 41(h)(3)(B))
The maximum annual amount that can be elected as a QSB payroll tax credit is the least of: (1) the current year research credit; (2) for a QSB that is not a partnership or S corporation, the amount of the Code Sec. 39 business credit carryforward; or (3) $250,000. (Code Sec. 41(h)(2) and Code Sec. 41(h)(4)(B))
All members of a controlled group of corporations or a group of businesses under common control (whether or not incorporated) are treated as a single taxpayer. (Code Sec. 41(h)(5)(A)) The credit must be allocated among the members in proportion to each member’s expenses on which the credit is based. (Code Sec. 41(h)(5)(B)(ii))
Each member of a controlled group of corporations or a group of businesses under common control may separately make the election to use a portion of its allocated Code Sec. 41 credit as a QSB payroll tax credit. (Code Sec. 41(h)(5)(B)(i))
RIA observation: IRS has not yet issued any rulings, etc. with respect to this election.
Changes to the 2016 Form 6765. The 2016 changes involve changes to Form 6765 Section C and the addition of new Section D.
In prior years, the last section of Form 6765 was Section C, and it was entitled “Summary.” For 2016, Section C, while performing a similar function to previous years’ Section C, is entitled “Current Year Credit,” and it contains changed and additional instructions that reflect the new rules discussed above.
The main source of change in Section C is the creation of new Section D, which is entitled “Qualified Small Business Payroll Tax Election and Payroll Tax Credit.” Section D is used to make the election to have a portion of the credit be a payroll tax credit. The amount so elected, which is shown on Schedule D, Line 44, is then transferred to Form 8974 (Qualified Small Business Payroll Tax Credit for Increasing Research Activities).
Section C contains the following new instructions that apply right before the payroll credit is calculated:
- Partnerships and S corporations not electing the payroll tax credit: stop here and report this amount on Schedule K.
- Partnerships and S corporations electing the payroll tax credit: complete Section D and report on Schedule K the amount on this line reduced by the amount on Line 44.
- Eligible small businesses: stop here and report the credit on Form 3800 (General Business Credit), Part III, Line 4i.
- Filers other than eligible small businesses: stop here and report the credit on Form 3800, Part III, Line 1c. Note: Qualified small business filers, other than partnerships and S corporations, electing the payroll tax credit must complete Form 3800 before completing Section D.
RIA observation: The relevant Form 3800 instructions provide that no amount elected as a payroll tax credit can be used to offset the current year income tax liability, nor can it be included in the carryforward or carryback calculation.
Note the following in Schedule D:
…The instructions to Line 43, on which taxpayers who elect the payroll credit compute their general business credit carryforward, contain a worksheet for computing that carryforward.
…Line 44, the line that shows the actual amount of the payroll credit, contains the instruction: “Members of controlled groups or businesses under common control: see instructions for the statement that must be attached.”
RIA observation: However, there is nothing in the instructions regarding the statement referred to in Line 44. While Line 34 describes a similar statement, there is no indication that the instructions pertaining to that line also apply to Line 44.
Instructions shed light on aspects of payroll tax credit. The Form 6765 instructions contain the following, which supplement the rules contained in the Code:
…The rule of Code Sec. 41(h)(5)(A), under which all members of the same controlled group are treated as a single taxpayer, means that the aggregate gross receipts of all members of such a group must be taken into account in determining whether a business is a qualified small business.
…For a controlled group, the amount that each member of the group can separately elect is limited to the least of: (a) the electing member’s allocable share of the group credit, (b) the electing member’s allocable share of the $250,000 amount, or (c) in the case of an electing member other than a partnership or S corporation, the amount of the electing member’s business credit carryforward under Code Sec. x39 carried from the tax year.
…The $250,000 amount is allocated to each member of a controlled group, regardless of whether all members of the group make the payroll tax credit election.
…A qualified small business claiming a portion of the research credit as a payroll tax credit must adjust the research credit carryforward for the payroll tax credit claimed.
For the research credit as a specified credit, see FTC 2d/FIN ¶ L-15202.3; United States Tax Reporter ¶ 384.02. For the research credit as an offset to payroll taxes, see FTC 2d/FIN ¶ L-15526; United States Tax Reporter ¶ 414.0109.
2016 Form 6765, Credit for Increasing Research Activities.
2016 Instructions for Form 6765.