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Form 8974 - Claim Qualified Small Business Payroll Tax Credit for Increasing
Research Activities

Updated on April 05, 2024 - 10:30 AM by Admin, TaxBandits

Form 8974 is used to determine the amount of qualified small business R&D payroll tax credits generated, used, and remaining for increased research and development activities. These credits can be claimed against the company’s employment tax return(s).

1. What is Form 8974?

Form 8974 is used by small businesses or start-ups to determine the amount of qualified small business payroll tax credits they can claim from their employment tax return on Form 941. Only qualified small businesses that elect to claim payroll tax credits should file Form 8974.

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Form 8974 should be filed along with your Form 941.

2. How do I claim the R&D Credit for
payroll tax?

To claim R&D credits, businesses must complete and submit Form 6765 - Credit for research activities. After creating the election to claim the credits, the business will need to submit Form 8974 with their quarterly Form 941 to claim the amount of qualified small business payroll tax credits for increased research activities.

3. What are the Changes in Form 8974
for 2023?

Form 8974 has undergone some changes, effective starting in the 2023 Tax Year. These changes are in response to the changes in the Inflation Reduction Act of 2022.

The Inflation Reduction Act of 2022 has doubled the amount of credit available from $250,000 to $500,000. However, starting in 2023, the employee share of social security can be reduced up to $250,00, and any remaining credit will be reduced from Medicare taxes.

As a result, line 12 in Form 8974 has been updated to “Credit against the employer share of social security tax
from “Credits.”

In addition, new lines 13-17 have been introduced in Form 8974 for the 2023 Tax Year and beyond.

4. What Qualifies for the R&D Tax Credit?

To be eligible for R&D tax credits, businesses must meet the following four criteria.

  • Your research must involve creating new products/processes or enhancing the existing ones.
  • Your research activities must include some experimental processes like QC, modeling, testing, and trial & error.
  • Your research activities should be technical in nature, which means they should rely on hard science and its principles to achieve the final results.
  • Your research activities should eliminate uncertainty which means your business must have confidence that you can achieve the desired result or must have implemented a design or development process to achieve it.

In addition, if you are filing Form 8974, the business must meet the following requirement of a qualified small
business (QSB).

  • You must be a qualified business with a gross receipt of less than $5 million for the tax year.
  • No gross receipt for any taxable year for any five-taxable year proceeding to the current tax year.

5. What is the Difference between Form 6765 and 8974?

Form 6765, also called Credit for Increasing Research Activities, is used by the business to claim credits for increasing research activities. These credits are intended to encourage businesses to invest in research and development activities.

Form 8974 is used by the Qualified Small Business (QSB) to determine the amount of R&D payroll tax credits that they can claim for a particular quarter or tax year on their employee payroll tax return(s). This credit was introduced by the Protecting Americans from Tax Hikes (PATH) Act of 2015, allowing eligible small businesses to claim a portion of their R&D credits as a payroll tax credit.

6. How can I Complete Form 8974 in Minutes with TaxBandits?

Completing Form 8974 is a simple process with TaxBandits. Follow these steps to complete Form 8974 while filing your quarterly Form 941 with TaxBandits.

  • Choose the Tax Year & Quarter
  • Fill in the required information on your Form 941
  • Complete and attach Form 8974 (if needed)
  • Review your Form 941
  • Transmit your Form 941 to the IRS

Get started with TaxBandits today. TaxBandits offers many helpful features that improve the efficiency and accuracy of filing Form 941. Pricing starts as low as $5.95/form.

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