Blog Post | Startups Get Relief with PATH Act

Money is tight everywhere in the business world, but particularly for startups. For them, the Protecting Americans from Tax Hikes (PATH) Act provides relief in the form of a $250,000 tax credit.

PATH, which took effect at the end of 2015, made a number of changes to the tax code; of special interest to small businesses, it both extends and makes permanent the federal R&D tax credit of 1981. Designed to encourage companies to invest in R&D, the 1981 tax credit applied to research expenses including wages, supplies, contract expenses, and payments to educational institutions and other research entities, for companies exploring innovative solutions whose development required substantial financial risk.

Among the changes PATH makes to the tax code is the option for startups to apply some or all of their research credit to offset their federal payroll tax—effectively creating a refundable credit of up to $250,000 for up to five years. The credit applies to the employer’s portion of Old-Age, Survivors, and Disability Insurance (OASDI) FICA taxes.

The enhanced R&D tax credit is available to businesses grossing less than $5 million that have been earning revenue for five years or less. Companies that aren’t currently making revenue are eligible; most tech companies meet the R&D criteria.

To take advantage of the R&D credit, you’ll need to include Form 6765, Credit for Increasing Research Activities, with your tax return. After electing to apply the R&D tax credit to your payroll liability, you may begin to use the offset to your OASDI tax in the following quarter. Already filed your return? Although you missed out on the opportunity to offset your payroll tax, you can amend your return to include the R&D expenses as an income tax credit.