The Inflation Reduction Act of 2022 (IRA) was signed into law on August 16, 2022. The legislation enhances the benefit for start-up companies by expanding the amount of the Research and Experimentation tax credit – often called the R&E or R&D Credit which can be used to offset payroll tax.
R&E Credit Offset
Beginning in 2016 with the PATH act, Qualified Small Businesses (QSB) were allowed to use up to $250,000 of their R&E Credit to offset the 6.2% employer portion of social security payroll taxes. This created a way for companies with no tax liability to benefit from this valuable tax credit.
The IRA adds the ability to elect an additional $250,000 of the R&E Credit against the 1.45% employer portion of Medicare taxes for tax years beginning after December 31, 2022. Companies will then be able to offset up to $500,000 of payroll tax expense with the R&D tax credit. Any credits not elected against payroll taxes can be applied as a general business credit.
Qualifying for the IRA Enhancement
The definition of a startup-up company or QSB remains unchanged. To be eligible as a QSB, the taxpayer must:
- Have gross receipts for the election year of less than $5 million and
- Be no more than five years past the period for which it had no receipts (the start-up period)
For example, if a QSB has $1 million in payroll expenses per quarter, the chart below illustrates the credit benefit increase for pre- and post- IRA R&D credit enhancement periods:
| 2022 | 2023 | |
| Social Security offset | $62,000 | $62,000 |
| Medicare offset | $0 | $14,500 |
| Total usage | $62,000 | $76,500 |
This favorable change to the start-up R&D credit opportunity will enable fast-growing startups to keep valuable dollars in the company for use to reinvest in building the business.
Learn More About the IRA Enactment and R&E Tax Credit
To get more information on how your business might benefit from the tax credit after the Inflation reduction act enactment, visit our R&D tax credit page to learn more about our processes and get in touch.
