Avoid delays and added costs when claiming the R&D payroll tax credit

New businesses and start-up companies may be eligible to apply R&D tax credits against their payroll taxes for up to five years.

The R&D credit can offer significant financial benefits if your company qualifies to receive it. However, there are a few common pitfalls that can delay receipt of the refund and may require additional effort and payments if your submission isn’t completed correctly the first time.

Here’s a checklist of five steps to complete the process in compliance with IRS standards as well as possible consequences if you get it wrong.

1. Identify the right providers

Claiming the R&D payroll tax credit can be complex and often involves coordination between the following parties:

• The taxpayer. The qualified small business performing eligible research activities.
• R&D tax provider. Typically a third party with experience in R&D tax law who verifies taxpayer eligibility, calculates the credit, and documents the credit on behalf of the taxpayer.
• Tax return preparer. The party who prepares the company’s federal income tax return on behalf of the taxpayer.
• Payroll processor. Usually a payroll service provider (PSP) or professional employer organization (PEO) that processes payroll and remits payroll taxes on the company’s behalf.
• IRS. The IRS verifies the federal tax returns filed on behalf of the taxpayer and remits payment.

Many taxpayers assume their tax return preparer or R&D tax provider will help them navigate the ins and outs of these complexities, managing the process from start to finish. However, that isn’t always the case. It’s important to identify an experienced provider to guide your company through the process to avoid getting stuck with credits on paper that your company might never use.

2. Process the credit and understand processing differences

Once your company has verified its eligibility, the credit should be calculated and documented in accordance with statutory and IRS requirements. To learn more about determining your company’s eligibility or calculating the credit, read our article.