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Double your R&D Tax Credit with the Inflation Reduction Act

August 25, 2022 by Levi Groner

r&d tax credit with the inflation reduction actThe Research & Development tax credit is a significant cash source for companies to offset development costs, adding immediate value to their investments. New legislation greatly increases the value of the R&D credit, making it a perfect time for companies to take advantage and learn how to double your R&D tax credit with the Inflation Reduction Act.

On Aug. 16, 2022, President Biden signed into law the Inflation Reduction Act of 2022.  For tax years beginning after December 31, 2022, the Inflation Reduction Act doubles the maximum R&D tax credit qualified start-ups can apply against their payroll tax liability from $250,000 to $500,000 per year.

Background

The Protecting Americans from Tax Hikes (PATH) Act of 2015 added a new payroll tax credit enabling start-ups that are qualified small businesses to elect to take all or a portion of their R&D credit against their Social Security tax, thus allowing companies with no income tax liability to effectively monetize their R&D credits immediately.

The PATH Act changed the R&D tax credit in significant ways, removing some restrictions companies faced when claiming the benefit. Three notable changes imposed by the PATH Act included:

  • Extending the length of the program by making it permanent as of January 1, 2015.
  • Enhancing the credit for startups, enabling smaller organizations to use credits each year against their payroll tax liability for up to five years
  • Allowing business owners to use the R&D credit to offset the Alternative Minimum Tax. Previously, taxpayers could only use the R&D credit to offset regular tax liability.

New changes

The Inflation Reduction Act enhances the existing payroll credit election for tax years beginning after December 31, 2022, in two significant ways:

  • Increases the maximum allowable payroll credit election from $250,000 to $500,000 each year.
  • The additional $250,000 credit can now be used to offset the employer’s Medicare payroll tax of 1.45% in addition to the Social Security tax. Now, $250,000 of the credit amount can be used to offset the 6.2% Social Security tax paid by employers and up to $250,000 can be used to offset the employer’s 1.45% Medicare tax.

How to double your R&D Tax Credit with the Inflation Reduction Act

To be eligible for the R&D tax credit and take advantage of more money with the Inflation Reduction Act, a company must meet the following 3 requirements:

Maximizing your R&D Tax Credit

One of the biggest hurdles companies face when claiming the R&D credit is correctly analyzing, calculating and documenting their qualifications. Errors can reduce your total amount or even increase the possibility of an IRS audit. The IRS provides an Audit Techniques Guide which may be helpful, but can add additional time and require more resources to accurately calculate your credit. Instead, many opt to partner with R&D tax credit experts such as Experian Employer Services, with industry veterans who understand the requirements, track new changes and adjustments and help you maximize your credit to get the most money back for your investments.

Book a demo today to learn how your business may be able to double your R&D tax credit with the Inflation Reduction Act.