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Form 8974 Instructions

Form 8974 calculates the amount of qualifying small business R&D payroll tax credits created, used, and available for future research and development operations. These credits can be claimed on the company's employment tax return(s).

Table of Contents

  • What is Form 8974?

What is Form 8974?

Form 8974 is used by small businesses and startups to calculate the qualified small business R&D payroll tax credits they can claim on their employment tax returns, specifically Form 941. This form helps businesses manage and utilize their research and development tax credits effectively.

Form 8974 Instructions - Step-by-Step Guide

Form 8974 Instructions - Step-by-Step Guide

Business Information

  • Enter Employer Identification Number (EIN): Input your EIN and business name as shown on Form 941, 943, or 944.
  • Form Selection: Check the applicable form box.
  • Schedule R: If filing Schedule R with Form 941 or 943, include the client's or customer's EIN.

Calendar Year and Quarter

  • Calendar Year: Enter the year as on Form 941, 943, or 944.
  • Quarter: Select the appropriate quarter on Form 941.

Part 1: Income Tax Return Details

Lines 1–5

 Part 1: Income Tax Return Details
  • Column (a): Income tax period ending date (MM/DD/YYYY).
  • Column (b): Type of income tax return filed that included Form 6765.
  • Column (c): Date the return was filed (MM/DD/YYYY).
  • Column (d): If the EIN on Form 6765 is different from the EIN on Form 8974, enter the EIN from Form 6765.
  • Column (e): Credit amount from Form 6765, line 44 (up to $250,000 per year before 2023; $500,000 after).
  • Column (f): Amount of credit previously taken.
  • Column (g): Remaining credit (subtract column (f) from column (e)). Sum all amounts in column (g) and enter on line 6, column (g).

Carryforward and Additional Years

  • Carryforward: If credit is unused in the first quarter, carry forward the amount to future quarters or years.
  • Additional Years: For additional years, use extra rows with the earliest year on line 1. The total may exceed $500,000 if carrying forward unused credits from multiple years.

Part 2: Determine Usable Credit This Period

Lines 7–17

Part 2: Determine Usable Credit This Period
  • Line 7: Remaining credit from Part 1, line 6, column (g).
  • Line 8: Social security tax amount from Form 941, line 5A, column 2.
  • Line 9: Additional social security tax from Form 941, line 5B, column 2.
  • Line 10: Total of lines 8 and 9.

Lines 11- 13

Lines 11- 13
  • Line 11: Multiply line 10 by 50% (limit credit to employer’s share of social security tax).
  • Line 12: Smaller of line 7 or line 11 (up to $250,000).
  • Line 13: Subtract line 12 from line 7.

Lines 14- 15

Lines 14- 15
  • Line 14: Medicare tax amount from Form 941, line 5C, column 2.
  • Line 15: Multiply line 10 by 50% (limit credit to employer's share of Medicare tax).

Lines 16-17

Lines 16- 17
  • Line 16: Smaller of line 13 or line 15 (up to $250,000).
  • Line 17: Add lines 12 and 16. Enter the total on Form 941, line 11 (or Form 943, line 12, or Form 944, line 8).

Claiming the R&D Payroll Tax Credit

To claim R&D credits, businesses must complete and submit Form 6765, Credit for Increasing Research Activities. After electing to claim the credits, submit Form 8974 with the quarterly Form 941 to utilize the small business payroll tax credits for increased research efforts.

2023 Updates to Form 8974

Form 8974 has been updated following the Inflation Reduction Act of 2022, which doubled the available credit from $250,000 to $500,000. The employer share of social security tax credit is now reduced to $250.00, with any remaining credit applied to Medicare taxes. New lines 13-17 have been added for the 2023 tax year.

Eligibility Criteria for R&D Tax Credits

To qualify for R&D tax credits, businesses must meet the following criteria:

  • New or Improved Products/Processes: The research must involve developing new products or processes or improving existing ones.
  • Experimental Techniques: Research must include experimental techniques such as quality control, modeling, testing, and trial & error.
  • Technical Nature: Research must rely on hard science principles.
  • Eliminating Uncertainty: Research should aim to eliminate technical uncertainties.

Additionally, businesses must meet the requirements of a Qualified Small Business (QSB):

  • Gross Receipts: Less than $5 million in gross receipts for the tax year.
  • No Prior Gross Receipts: No gross receipts in any of the five taxable years preceding the current tax year.

Form 8974 calculates the R&D tax credit, which can reduce payroll tax liability on Form 941.

Comparing Form 6765 and Form 8974

  • Form 6765: Used to claim credits for increasing research activities, encouraging R&D investments.
  • Form 8974: Calculates R&D payroll tax credits for specific quarters or tax years on employee payroll tax returns. Authorized by the PATH Act of 2015.

Using TaxZerone to Complete Form 8974 while filing Form 941

Complete Form 8974 & Form 941 easily with TaxZerone:

  • Select the tax year and quarter.
  • Fill out Form 941 with necessary information
  • Enter the qualified small business payroll tax credit on Form 941, line 11.
  • Complete and attach Form 8974 (if necessary).
  • Review and submit Form 941 to the IRS.

Start using TaxZerone today for efficient and accurate Form 941 filing.