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

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by Alanupdated on December 1, 2023October 13, 2023Leave a Comment on Form 8974: Qualified Small Business Payroll Tax Credit for Increasing Research Activities

Contents

What is Form 8974?

Form 8974 is used by employers to determine the amount of the qualified small business payroll tax credit for increasing research activities that they can claim on applicable federal tax forms, such as Form 941, 943, and 944. To take advantage of this credit, employers must make an election on their income tax return on Form 6765, and then file Form 8974 with the applicable tax form. Additionally, section 3504 agents, CPEOs, and other third-party payers may have to complete additional paperwork if any of their clients are taking the credit. For errors on already-filed Form 8974, employers must file an adjusted tax return with a corrected Form 8974 attached. Lastly, employers can claim the credit for the quarter that begins after they file the income tax return on Form 6765, or for the year that includes that quarter for annual filers.

See also: Form 8994: Employer Credit for Paid Family and Medical Leave

IRS Form 8974 – Who Needs to Fill It Out?

You must file Form 8974 and attach it to Form 941, 943, or 944 if you have previously made an election on your income tax return to claim the qualified small business payroll tax credit for increasing research activities. The credit must have been elected on an original income tax return that was filed on time. Also, third-party payers (such as non-certified PEOs) must file Schedule R as well as Form 8974 if any of their clients are claiming the credit. The form must be attached to the Form 941, 943, or 944; however, you can’t do so unless you’ve first made the election on Form 6765. Lastly, the required quarter or year to take the credit is determined on Form 8974.

Step-by-Step: Form 8974 Instructions For Filling Out the Document

Form 8974 is an important document that must be filled out and attached to Form 941, 943 or 944 if a taxpayer elects to claim the qualified small business payroll tax credit for increasing research activities on their income tax return. To be eligible for the credit, the election must be made on Form 6765 and the return must be timely filed with the election. After filing the return, the Form 8974 can be filled out and claimed on the Form 941, 943 or 944 on the quarter or year that follows the filed return. Aggregate Form 941 or Form 943 filers, such as certified professional employers, must also complete additional forms and attach a Form 8974 for each client claiming the credit. If an error is discovered on the previously filed Form 8974, it can be corrected by filing Form 941-X, Form 943-X, or Form 944-X and attaching a corrected Form 8974.

See also: Form 5310-A: Notice of Plan Merger or Consolidation, Spinoff, or Transfer of Plan Assets or Liabilities; Notice of Qualified Separate Lines of Business

Below, we present a table that will help you understand how to fill out Form 8974.

Key Information for Form 8974	Details
Purpose	Claim the qualified small business payroll tax credit for increasing research activities
Election	Must be made on Form 6765 and filed with the income tax return
Correction	If errors are discovered, correct with Form 941-X, 943-X, or 944-X

See also: Form 8947: Report of Branded Prescription Drug Information

Do You Need to File Form 8974 Each Year?

If you’ve made an election to claim the qualified small business payroll tax credit for increasing research activities on your income tax return, you must then file Form 8974 each year – either with Form 941, 943, or 944 depending on your filing. When filing an aggregate Form 941 or 943, you must complete and file Schedule R if any of your clients are claiming the payroll tax credit. Additionally, if you need to correct a previously filed Form 8974, you must attach a corrected Form 8974 to an amended return filed using Form 941-X, 943-X, or 944-X, respectively. Finally, when you can first claim the credit will depend on your filing frequency – quarterly Form 941 filers can claim the credit on the Form 941 for the quarter that begins after they file their income tax return making the election, while annual Form 943 or 944 filers can claim the credit on the Form 943 or 944 for the year that includes that quarter.

Download the Official IRS Form 8974 PDF

On the official IRS website, you will find a link to download Form 8974. However, to make it easier for you, we are providing the link in our article, which comes directly from the official irs.gov website! Click to download: Form 8974

Sources:

https://www.irs.gov/forms-pubs/about-form-8974

https://www.irs.gov/instructions/i8974

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Form 8974: Qualified Small Business Payroll Tax Credit for Increasing Research Activities - whatisform.com (2024)

FAQs

Who qualifies for 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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How does the credit for increasing research activities work? ›

Typically, 6% to 8% of a company's annual qualifying R&D expenses can be applied, dollar for dollar, against its federal income tax liability. Various activities may qualify for the credit, including but not limited to: Developing processes, patents, formulas, techniques, prototypes or software.

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Is there a worksheet for the ERC? ›

With these worksheets, you can calculate your potential tax credit. Depending on the purpose, employers can utilize five different types of ERC worksheets. The different types of Form 941 Employee Retention Credit worksheets are available for download listed below.

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What is SEC 13902 increase in research credit against payroll tax for small businesses? ›

But the IRS just explained in its guidance for the 2023 Tax Year that: “Provision 13902 of the IRA of 2022 increased the maximum amount of payroll tax research credit that a QSB can elect to apply against payroll tax liability from $250,000 to $500,000 for tax years beginning after December 31, 2022.”

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What is 8974? ›

Form 8974 is essential to computing and claiming the R&D Tax Credit for payroll taxes incurred as a result of the increase in research activities. Once a business has received approval from the IRS to claim the R&D Tax Credit, Form 8974 must be filed.

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What is the difference between form 8974 and form 6765? ›

Form 6765 is also used to figure the amount of the credit that a business is eligible to claim. Form 8974 is filed quarterly with the employer's payroll tax returns, Forms 941, 943, or 944. The form is used to claim the payroll tax credit against the employer's share of social security taxes.

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What expenses qualify for R&D tax credit? ›

Qualified research expenses include: Employee compensation for performing certain qualified services. Materials necessary for conducting qualified research and development. Payments to secure the use of computers for the use of conducting research.

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What is the limit for the research credit? ›

For tax years beginning after 2022, the maximum amount of payroll tax research credit a small business can apply against payroll tax liability increased from $250,000 to $500,000. See Payroll Tax Credit Election, later. Research credit claims on amended returns.

How do I get my ERC money? ›

To qualify for ERC, you need to have been subject to a qualifying government order related to COVID-19 that caused a full or partial suspension of your trade or business operations. The government order may be at the local, state or federal level.

What are two ways to qualify for ERC? ›

First, if your business was affected by a mandated full or partial suspension of business then you automatically qualify for the ERC. ‍The second way to qualify, is based on a significant reduction in gross receipts.

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What is form 8974? ›

Employers use this form to determine the amount of qualified small business payroll tax credit for increasing research activities they can claim on their employment tax return.

Learn More Now ›

What is the small business payroll tax credit? ›

The Qualified Small Business (QSB) R&D Payroll Tax Credit is a tax incentive geared specifically for early-stage companies. The credit can be used to offset payroll tax, either instead of or in addition to federal income tax.

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What is the research tax credit? ›

The research tax credit applies to the following research expenditures: Depreciation of property or buildings which have been created or acquired new. They must be used in carrying out scientific and technical research.

What is line 12 on form 8974? ›

As a result, Line 12 of Form 8974 now reads "Credit against the employer share of social security tax" rather than "Credits". In addition, new lines 13-17 on Form 8974 have been added for the 2023 tax year and beyond.

Who fills out a w8eci? ›

You must give Form W-8 ECI to the withholding agent or payer if you are a foreign person and you are the beneficial owner of U.S. source income that is (or is deemed to be) effectively connected with the conduct of a trade or business within the United States.

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How to file form 8974 with ADP? ›

ADP Run requires that you submit a partially complete Form 8974 to ADP.JobCredit.Request@adp.com. They will complete and submit Form 8974 at the end of the quarter. You will receive a refund check in the mail directly from the IRS. Form 8974 needs to be submitted quarterly until the credit is exhausted.