I elected the payroll tax offset on my Form 6765, so why didn’t I get my refund?
While this new provision has served as a great opportunity for startup companies to conserve cash in the years they need it most, the actual process required to claim and utilize the offset has led to some major confusion. This is because many taxpayers who elected the research credit last year were not fully aware of the process necessary to claim it.
Thus, many puzzled taxpayers are now questioning why they haven’t received their payroll tax refund, even though they elected the option on their Form 6765.
Because this is one of the most common questions our firm has fielded this year, I want to share detail regarding the actual process that should have been followed when filing these claims, and where we’ve seen missteps along the way.
Let’s start by taking a look at the process that should have been followed:
Payroll Tax Offset Filing Requirements:
Step 1 – Completion and Filing of Form 6765 – Assuming that a taxpayer met the requirements to utilize this provision, they should have affirmatively elected the payroll tax credit on Form 6765. This Form was modified (starting in 2016 and in subsequent years) to include Section D – Qualified Small Business Payroll Tax Election and Payroll Tax Credit. The electing taxpayer then needed to check-the-box on Line 41, and then enter the applicable amount on Line 42. If applicable, any general business credit carryforwards for the current year should have been identified on Line 43. And finally, the taxpayer should have calculated the allowable offset credit amount on Line 44.
But wait, there’s more!
Step 2 – Completion and Filing of Form 8974 – The offset process then required the taxpayer to enter the amount from Line 44 of the Form 6765 onto a new form, Form 8974 – Qualified Small Business Payroll Tax Credit for Increasing Research Activities. (It is on Form 8974, where the taxpayer calculates the amount of credit that can be used in the current payroll quarter, and the amount of payroll tax that can be offset.) Once completed, this form must then be attached to the appropriate Form 941.
Not done yet!!
Step 3 – Completion and Filing of Form 941 – Finally, the credit calculated on Form 8974 (Line 12) should have been reported on Form 941 (Line 11), in order to direct the IRS to offset payroll tax with the credit. With the completion of this step in the process, the IRS can credit the taxpayer’s account for the elected offset, and if directed so on the Form 941, issue any related refunds due.
So where’s the Ball Being Dropped?
Now that we’ve looked at the complete process necessary to file these claims, we can focus next on where we’ve seen issues occurring in the process:
Issue 1: Who will prepare Form 8974?
In some of the scenario’s we’ve seen, the issue at hand has been a simple misstep between Step 1- the preparation of Form 6765, and Step 2 – the preparation of Form 8974, in that there has been miscommunication between the tax preparer and taxpayer on who is completing Form 8974.
In some cases, unknowingly to the taxpayer, the completion of Form 8974 was not considered to be a part of the normal scope of tax return preparation work, thus it was simply not completed by the tax preparer, and therefore was never submitted to a payroll provider for filing completion.
Issue 2: Who will deliver Form 8974 to the payroll provider?
In other scenarios, we’ve seen a misstep between Step 2 and Step 3 – getting the necessary information from Form 8974 onto Form 941. More specifically, there has again been a communication breakdown of how the information on Form 8974 will get into the hands of the payroll service provider for completion of Form 941.
In most cases where we’ve seen this issue occur, the tax preparer and payroll service provider are different, thus creating the potential for issue.
As an example, does the tax preparer send Form 8974 directly to the payroll service provider? Or, does the tax preparer send Form 8974 to the taxpayer, who must then send it to the payroll service provider?
In the scenario’s we’ve seen, it’s not common practice for the tax preparer to send information to the payroll service provider, thus the onus is often left on the taxpayer.
Unfortunately, in many of these instances, the tax preparer has assumed the taxpayer knew to forward the information on to the payroll service provider, and vice-versa, the taxpayer has assumed the tax preparer was sending the detail directly to the payroll tax provider.
As you can see, even if the Form 8974 has been filed correctly, the simple misstep in getting the information into the hands of the payroll provider can cause a major issue in the filing process.
As more and more eligible small business taxpayers begin to claim this new payroll tax offset incentive, it will become critical that the lines of communication between the tax preparer, taxpayer and payroll service provider are clear. Having this process ironed out in advance is the best way to ensure the taxpayer will receive the credit that they deserve.
Michael Krajcer, JD, CPA is President of Tax Credits Group. He has specialized in the R&D Tax Credit since he started with IRS in 1986 and was the Cleveland large case technical specialist on the issue. Subsequent to his government career, he continued as an expert in the credit area in Big-4 accounting, industry, and with his own national practice. Mike has worked with hundreds of companies throughout the United States and has resolved dozens of IRS and state audits of credit claims.