R&D payroll tax credit increases for 2023

By Ginny Veit

Companies performing research and development (R&D) activities in 2023 can take advantage of a supercharged R&D tax credit against their payroll taxes. The payroll credit can be a hugely valuable cash flow tool for early stage tech companies that should be part of your year-end planning discussions.

The payroll tax election under Section 41(h)

Beginning in 2016, qualified small businesses could elect to apply their R&D credit against employer payroll taxes in lieu of income tax. A qualified small business is generally one that has not been earning revenue for more than five years and whose current/credit year revenue is less than $5 million.

Through December 31, 2022, the credit was applied against the employer portion of social security tax (6.2%), subject to a maximum election of $250,000 per taxable year.

What changed?

Aside from making significant changes in the world of clean energy tax credits, the Inflation Reduction Act also modified the R&D payroll credit by increasing the maximum amount of the election to $500,000. The legislation also now permits the credit to be applied against the employer portion of Medicare tax (1.45%) in addition to social security tax. These changes are effective for tax years beginning after December 31, 2022.

We can help

If you’re an R&D-focused startup, be sure to make the R&D payroll credit part of your 2023 tax planning discussion. CLA can assist your organization in calculating and documenting your available credits and set you up for success in claiming credits for future years.