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The Inflation Reduction Act of 2022 (IRA) doubled the amount of the Payroll Tax Credit election for the Research & Development Tax Credit. For tax years beginning after December 31, 2022, Qualified Small Businesses (“QSBs”) can potentially offset its payroll taxes up to $500,000 a year for up to five years.
Prior to the passage of the IRA, QSBs could make a Payroll Tax Credit election of their Research & Development Tax Credit to offset only the 6.2% employer portion of Social Security payroll tax liability up to $250,000 per year for up to five years. The IRA now allows Qualified Small Businesses to take an additional $250,000 to offset the 1.45% employer portion of Medicare payroll tax liability. As you can see, the $500,000 cap per year is bifurcated allowing for QSBs to offset both of its employer payroll tax obligations (its Social Security tax as well as its Medicare tax). However, this means that Qualified Small Businesses cannot offset more than $250,000 per year (up to five years) to each portion of its employer payroll tax liability.
The IRA did not change any of the other eligibility requirements for the Payroll Tax Credit election of the Research & Development Tax Credit.
The additional $250,000 amount of Payroll Tax Credit will not provide any tax benefits until 2024, the first year in which a Qualified Small Businesses has filed its income tax return for its 2023 tax return.
Due to the passage of the IRA eligible start-up companies and loss companies may be able to claim up to $500,000 to offset their Payroll Tax obligations against their 2024 employment taxes.
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