--- title: Research Credit Can Offset a Small Business's Payroll Taxes description: Machen McChesney provides information to small business owners who may be eligible for the research tax credit which they can use for help to reduce payroll tax bill instead of its income tax bill. image: https://info.machen.cpa/hubfs/iStock-186140619-952521-edited.jpg --- [Family of Services](http://machenmcchesney.com/about-us/family-of-companies/)  |  [CPA & Business Advisory](http://machenmcchesney.com)  |  [Payroll, HR & Benefits](http://focuspaysolutions.com/)  |  [Wealth Management](http://machenmcchesney.com/services/financial-planning-and-wealth-mangement-services/) Auburn-Opelika (334) 887-7022 | Montgomery (334) 244-8900 [![Machen McChesney](https://info.machen.cpa/hs-fs/hub/471263/file-2521950511.png?width=279&name=file-2521950511.png "Machen McChesney")](http://machenmcchesney.com) Search this site on Google Search Google Search this site on Google Search Google - [Client Portal](https://machenmcchesney.sharefile.com/Authentication/Login) - 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[Tweet](https://twitter.com/share) [![iStock-186140619-952521-edited.jpg](https://info.machen.cpa/hs-fs/hubfs/iStock-186140619-952521-edited.jpg?width=1024&height=300&name=iStock-186140619-952521-edited.jpg)](https://info.machenmcchesney.com/blog/research-credit-can-offset-a-small-businesss-payroll-taxes)Does your small business engage in qualified research activities? If so, you may be eligible for a research tax credit that you can use to offset your federal *payroll* tax bill. This relatively new privilege allows the research credit to benefit small businesses that may not generate enough taxable income to use the credit to offset their federal *income* tax bills, such as those that are still in the unprofitable start-up phase where they owe little or no federal income tax. **QSB status** Under the Protecting Americans from Tax Hikes Act of 2015, a qualified small business (QSB) can elect to use up to $250,000 of its research credit to reduce the Social Security tax portion of its federal *payroll* tax bills. Under the old rules, businesses could use the credit to offset only their federal *income* tax bills. However, many small businesses owe little or no federal income tax, especially small start-ups that tend to incur significant research expenses. For the purposes of the research credit, a QSB is generally defined as a business with: - Gross receipts of less than $5 million for the current tax year, and - No gross receipts for any taxable year preceding the five-taxable-year period ending with the current tax year. The allowable payroll tax reduction credit can’t exceed the employer portion of the Social Security tax liability imposed for any calendar quarter. Any excess credit can be carried forward to the next calendar quarter, subject to the Social Security tax limitation for that quarter. **Research activities that qualify** To be eligible for the research credit, a business must have engaged in “qualified” research activities. To be considered “qualified,” activities must meet the following four-factor test: 1. The purpose must be to create new (or improve existing) functionality, performance, reliability or quality of a product, process, technique, invention, formula or computer software that will be sold or used in your trade or business. 2. There must be an intention to eliminate uncertainty. 3. There must be a process of experimentation. In other words, there must be a trial-and-error process. 4. The process of experimentation must fundamentally rely on principles of physical or biological science, engineering or computer science. Expenses that qualify for the credit include wages for time spent engaging in supporting, supervising or performing qualified research, supplies consumed in the process of experimentation, and 65% of any contracted outside research expenses. **Complex rules** The ability to use the research credit to reduce payroll tax is a welcome change for eligible small businesses, but the rules are complex and we’ve only touched on the basics here.  **For more information on [research credit](http://machenmcchesney.com/industries/manufacturing-distribution-automotive/), please contact Melissa Motley, CPA, at (334) 887-7022 or by leaving us a message below.** Topics: [Business Tax](https://info.machen.cpa/blog/topic/business-tax) Search this site on Google Search Google ### Recent Posts ### Subscribe to Blog ### Posts by Category - [Business Tax (353)](https://info.machen.cpa/blog/topic/business-tax) - [Business Advisory (231)](https://info.machen.cpa/blog/topic/business-advisory) - [Payroll, HR & Benefits (122)](https://info.machen.cpa/blog/topic/payroll-hr-benefits) - [Audit & Assurance (112)](https://info.machen.cpa/blog/topic/audit-assurance) - [Accounting & Outsourcing (79)](https://info.machen.cpa/blog/topic/accounting-outsourcing) - [Individual Tax (75)](https://info.machen.cpa/blog/topic/individual-tax) - [Tax Planning (33)](https://info.machen.cpa/blog/topic/tax-planning) - [Tax Updates (25)](https://info.machen.cpa/blog/topic/tax-updates) - [Retirement & Wealth Management Planning (18)](https://info.machen.cpa/blog/topic/retirement-wealth-management-planning) - [Taxation (15)](https://info.machen.cpa/blog/topic/taxation) - [Alerts (13)](https://info.machen.cpa/blog/topic/alerts) - [Business Valuation (11)](https://info.machen.cpa/blog/topic/business-valuation) - [Tax News (11)](https://info.machen.cpa/blog/topic/tax-news) - [Individual Tax Planning (10)](https://info.machen.cpa/blog/topic/individual-tax-planning) - [News & Events (10)](https://info.machen.cpa/blog/topic/news-events) - [Not For Profit (10)](https://info.machen.cpa/blog/topic/not-for-profit) - [Retirement Planning (9)](https://info.machen.cpa/blog/topic/retirement-planning) - [Estate Planning (8)](https://info.machen.cpa/blog/topic/estate-planning) - [Manufacturing Industry Insights (7)](https://info.machen.cpa/blog/topic/manufacturing-industry-insights) - [Individuals (1)](https://info.machen.cpa/blog/topic/individuals) - [Insider (1)](https://info.machen.cpa/blog/topic/insider) - [Professional Standard News (1)](https://info.machen.cpa/blog/topic/professional-standard-news) see all [![Returning_Value](https://info.machen.cpa/hs-fs/file-2504250850-jpg/Machen-Blog-Image/Returning_Value.jpg)](http://machenmcchesney.com/about-us/mission-and-values/) - [![](https://info.machen.cpa/hs-fs/file-2486483166-jpg/Machen-Blog-Image/aicpa.jpg)](http://www.aicpa.org/Pages/default.aspx) - [![](https://info.machen.cpa/hs-fs/file-2494475845-jpg/Machen-Blog-Image/bdo.jpg)](http://www.bdo.com/alliance/) - [![](https://info.machen.cpa/hs-fs/file-2494475855-jpg/Machen-Blog-Image/nacva.jpg)](http://www.nacva.com/) - [![](https://machenmcchesney.com/img/readers-choice2019.jpg)](https://oanow.upickem.net/engine/Winners.aspx?contestid=104699) - [![actbf-1](https://info.machen.cpa/hs-fs/hubfs/actbf-1.jpg?width=121&name=actbf-1.jpg)](http://www.accountingtoday.com/) - [![pa400](https://info.machen.cpa/hs-fs/hubfs/pa400.jpg?width=121&name=pa400.jpg)](http://insidepublicaccounting.com/) 1820 East University Drive, Auburn, AL 36830 | Tel: (334) 887-7022 | Fax: (334) 887-7221 1761 Taliaferro Trail, Montgomery, AL 36117 | Tel: (334) 244-8900 | Fax: (334) 364-0927 - [LinkedIn](https://www.linkedin.com/company/675439?trk=tyah&trkInfo=idx%3A1-1-1%2CtarId%3A1424436970395%2Ctas%3Amachen+mcchesney) - [Facebook](https://www.facebook.com/machenmcchesney) - [Google](https://plus.google.com/101356546927388458481) - [Twitter](https://twitter.com/machenmcchesney) [Powered by Skoda Minotti Strategic Marketing](http://marketing.skodaminotti.com)