Using R&D Tax Credit to offset the employer's portion of payroll tax may be most applicable for early-stage startups. 


On December 18, 2015, the Consolidated Appropriation Act ("the PATH Act") provided two new tax benefits for eligible small businesses. One of the benefits is the offsetting of payroll taxes for qualified small businesses. Effective for tax years beginning after December 31, 2015, a qualified small business may elect to apply a portion of its R&D Tax Credit, up to $250,000 against its payroll tax liability (generally, 6.2% of an employee's salary), instead of its income tax liability. This means early-stage startups building innovative products but operating at a loss may be able to claim R&D Tax Credit benefits against their payroll tax.

General Qualifications

The following qualifications should be considered in order to be qualified to offset the payroll tax:

  • Gross receipts for the tax year of less than $5 million.
  • No gross receipts for any tax years preceding the 5 tax year period ending with the tax year.
    • If a taxpayer making this election for 2016, a taxpayer must not have had any gross receipts in tax year preceding 2012.


  • The credit amount must be specified on the federal tax return before using the benefit.
  • The credit amount is allowed to use the first calendar quarter beginning after the date on which the company files its tax return for the tax year.
    • For example, if a company files its 2016 tax return on September 2017 then the R&D credit can be used against the payroll tax liability on the fourth quarter of 2017.
  • Credit does not affect deductibility of payroll taxes.
  • Definition of gross receipts (Sec 1.488-1T(f)(2)(iv)) for payroll tax election is not identical for the purposes of Sec. 41(c)(2).
  • For corporations and partnerships, the gross receipts and the credit limitation applies on a controlled group basis.

Find out how Pinecone41's R&D Tax Credit expertise can help your startup.


* Please note that the information presented on this page are to be regarded as general information, and should not be interpreted as tax, financial, or legal advice.