R&D Credit Payroll Tax Offset Enhanced by the Inflation Reduction Act

The Inflation Reduction Act of 2022 (IRA) was signed into law on August 16, 2022.  The legislation enhances the benefit for start-up companies by expanding the amount of the Research and Experimentation tax credit – often called the R&E or R&D Credit which can be used to offset payroll tax.

R&E Credit Offset

Beginning in 2016 with the PATH act, Qualified Small Businesses (QSB) were allowed to use up to $250,000 of their R&E Credit to offset the 6.2% employer portion of social security payroll taxes. This created a way for companies with no tax liability to benefit from this valuable tax credit.

The IRA adds the ability to elect an additional $250,000 of the R&E Credit against the 1.45% employer portion of Medicare taxes for tax years beginning after December 31, 2022.  Companies will then be able to offset up to $500,000 of payroll tax expense with the R&D tax credit. Any credits not elected against payroll taxes can be applied as a general business credit.

Qualifying for the IRA Enhancement

The definition of a startup-up company or QSB remains unchanged. To be eligible as a QSB, the taxpayer must:

  • Have gross receipts for the election year of less than $5 million and
  • Be no more than five years past the period for which it had no receipts (the start-up period)

For example, if a QSB has $1 million in payroll expenses per quarter, the chart below illustrates the credit benefit increase for pre- and post- IRA R&D credit enhancement periods:

2022 2023
Social Security offset $62,000 $62,000
Medicare offset $0 $14,500
Total usage $62,000 $76,500

This favorable change to the start-up R&D credit opportunity will enable fast-growing startups to keep valuable dollars in the company for use to reinvest in building the business.

Learn More About the IRA Enactment and R&E Tax Credit

To get more information on how your business might benefit from the R&D tax credit after the Inflation reduction act enactment, visit our R&D tax credit page to learn more about our processes and get in touch.