During a December 1 payroll industry conference call, the IRS discussed the recent increase in the qualified small business payroll tax credit for increasing research activities as provided under the Inflation Reduction Act.

Background: A provision of the Inflation Reduction Act allows a “qualified small business” (QSB), for tax years beginning after December 31, 2022, to apply an additional $250,000 in qualifying expenses as a payroll tax credit against the employer share of Medicare. Prior to the act, a QSB could apply $250,000 against the employer share of Social Security. The total credit that may be applied will be $500,000 beginning after December 31, 2022. Unused amounts of the credit may be carried over.  

Future form revisions: The IRS noted that Form 6765 (Credit for Increasing Research Activities) and its instructions must be revised and will reflect the increased $500,000 limit for the payroll tax credit election. Further, Form 8974 (Qualified Small Business Payroll Tax Credit for Increasing Research Activities) and its instructions must be updated to calculate the amount of credit that can be applied against both Social Security and Medicare. The IRS anticipates the updated forms to be released during the first quarter of 2023.

Claiming the credit: The IRS emphasized that the calculation of the credit does not change on Form 6765 and that only the amount of the credit increases. This form is attached to tax returns as an annual election and cannot be made for the tax year if the election was made for five or more preceding tax years. Taxpayers can claim the credit on Form 941 starting with the first quarter that began after the election. Form 8974 must be completed and attached to Form 941. When the new election with the $500,000 limit is made on Form 6765 that is in effect for 2023 tax year, the IRS expects that it will be claimed in 2024.

Electronic filing of Form 8974: This form is available to be filed electronically. Moreover, Form 8974 can be used to indicate up to a $250,000 credit for the employer share of Social Security and an additional $250,000 credit for the employer share of Medicare. Amounts that are not used can be carried over to a subsequent employment tax return.

Source: Thomson Reuters

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