Using R&D credits to reduce payroll taxes: An overlooked opportunity for startups (2024)

For many years, the Sec. 41 research and development credit has provided incentives for businesses to increase their investment in research activities.¹ To further this congressional intent, the Protecting Americans From Tax Hikes (PATH) Act of 2015 created, in the authors' opinion, an important but overlooked provision for small startup businesses that cannot use an income tax credit in their critical early years of operation.²

Effective for tax years beginning after Dec. 31, 2015, a qualified small business (QSB) may elect under Sec. 41(h) to use its research credit as a credit against the employer portion of its old age, survivors, and disability insurance (OASDI) liability.³ The credit does not apply against the employer portion of Medicare taxes nor against the employee portion of Federal Insurance Contributions Act (FICA) taxes that the employer is required to withhold and remit to the government.⁴

This article presents an overview of the rules governing the computation of the research credit and then examines when a taxpayer may elect to claim the credit against its OASDI liability if the taxpayer has little or no income tax.⁵ This use of the research credit against payroll tax for qualified small businesses that are startup companies can save critical resources for them in their early years.

To understand the election to claim the research credit against an employer's payroll tax, a brief description of the research credit itself is in order so that taxpayers can determine if they are eligible for a credit in the first place. This description is not intended to analyze the rules of the research credit in detail but simply to assist taxpayers in understanding the types of expenditures that qualify for the credit that might offset payroll taxes.

Research expenditures qualifying for credit

The Sec. 41 research credit is a percentage of the qualified research expenditures (QREs) that a taxpayer incurs in a year in connection with its trade or business over a certain base amount.⁶ QREs are the sum of "in-house research expenses" and "contract research expenses."⁷

In-house research expenses⁸ are: (1) wages paid to an employee engaged in qualified research or in direct supervision or support of qualified research;⁹ (2) amounts paid for supplies used to conduct qualified research;¹⁰ and (3) amounts paid for the use of computers for the conduct of qualified research.¹¹ Contract research expenses are 65% of amounts paid or incurred by the taxpayer to persons other than employees for qualified research.¹²

Qualified research¹³ for this purpose is research that meets the following four tests:¹⁴

• The expenditure is a trade or business expenditure that would otherwise be capitalized but for Sec. 174 described below;¹⁵
• The research is undertaken to discover information that is technological in nature (i.e., based on physical, biological, engineering, or computer science principles);¹⁶
• Substantially all the research must contain elements of a process of experimentation relating to a new or improved function, performance, reliability, or quality;¹⁷ and
• The research is intended to be useful in the development of a new or improved business component of the taxpayer.¹⁸

Expenses related to efficiency surveys,¹⁹ management studies,²⁰ market research,²¹ routine data collection,²² and quality control²³ do not qualify. Finally, the following types of research are specifically excluded from the definition of qualified research: research conducted after the beginning of the commercial production of a business component;²⁴ research related to the adaptation of an existing business component to a particular customer's requirement or need, or the duplication of an existing business component;²⁵ foreign research;²⁶ research in the social sciences, arts, or humanities;²⁷ and funded research.²⁸

Amount of credit

In general, a taxpayer may claim a research credit of 20% of the amount of the taxpayer's QREs for a tax year that exceed its "base amount" for that year.²⁹ The base amount is defined as the product of the fixed-base percentage³⁰ and the taxpayer's average annual gross receipts for the four years preceding the credit year,³¹ but not less than 50% of the QREs for the credit year.³² Alternatively, taxpayers may elect a simplified credit of 14% of the excess of the QREs for the tax year over 50% of the average QREs for the three years preceding the year for which the credit is being determined.³³

Credit limitations

The research credit is one of the credits that make up the general business credit,³⁴ which cannot exceed the excess of the taxpayer's "net income tax" over the greater of the tentative minimum tax for the year or 25% of the taxpayer's "net regular tax" that exceeds $25,000.³⁵ Net income tax means the regular tax and alternative minimum tax less nonrefundable personal credits, foreign tax credits, and certain credits dealing with motor vehicles.³⁶ Net regular tax means the regular tax less the same credits.³⁷

In addition, certain "eligible small businesses" may use the research credit to offset their alternative minimum tax. Eligible small businesses for this purpose are nonpublicly traded corporations, partnerships, and sole proprietorships with less than $50 million in average gross receipts for the three preceding tax years.³⁸ Credits for a partnership or S corporation are not allowed to a partner or shareholder unless the partner or shareholder meets the $50 million gross receipts limit for the year the credit is claimed.³⁹

Any unused portion of the credit may be carried back one year and forward 20 years.⁴⁰ Any unused credit at the end of the 20-year carryover period may be deducted in the 21st year.⁴¹

Reporting requirements

Form 6765, Credit for Increasing Research Activities, is filed to claim the regular and the alternative simplified research credits. If there is a general business credit in addition to the research credit or a carryback or carryforward of the general business credit, the research credit is carried to Part III of Form 3800, General Business Credit.⁴² Partnerships and S corporations must file Form 6765 to claim the credit. All other taxpayers are generally not required to complete or file the form if their only source for the research credit is a partnership, S corporation, estate, trust, or cooperative. Instead, they can report this credit directly on Form 3800. However, this rule does not apply to a taxpayer that is an estate or trust, and the credit can be allocated to beneficiaries.⁴³

Deducting research expenses

The research credit of Sec. 41 is not the only Code provision favoring research expenditures. Sec. 174 allows an immediate deduction for research or experimental expenditures that would otherwise have to be capitalized.⁴⁴ But deductions are permitted only to the extent they are reasonable.⁴⁵ For this purpose, research or experimental expenditures are "expenditures incurred in connection with the taxpayer's trade or business which represent research and development costs in the experimental or laboratory sense."⁴⁶ An activity is research and development in the experimental or laboratory sense if (1) uncertainty exists concerning the development or improvement of a product, i.e., the information available to the taxpayer does not establish the capability or method for developing or improving a product or process or the appropriate design of a product or process; and (2) the activity is intended to discover information that would eliminate this uncertainty.⁴⁷

However, Sec. 280C(c) prevents a double benefit, denying any deduction under Sec. 174 by the amount of a credit claimed under Sec. 41 for the same expenditures.⁴⁸ Alternatively, the taxpayer may elect to claim a reduced research tax credit in lieu of reducing otherwise allowable deductions.⁴⁹

Upcoming changes

Finally, for tax years beginning after Dec. 31, 2021, the law known as the Tax Cuts and Jobs Act⁵⁰ changes the treatment of specified research and experimental expenditures, requiring their capitalization and amortization over five years (15 years for foreign research), beginning at the midpoint of the tax year in which the expenditures are paid or incurred.⁵¹ While "specified research and experimental expenditures" are defined simply as research and experimental expenditures paid or incurred by the taxpayer in connection with the taxpayer's trade or business,⁵² any amount paid or incurred in connection with software is treated as a research and experimental expenditure.⁵³ The new law also provides that any expenditure for the acquisition or improvement of land or property subject to depreciation or depletion as well as expenditures paid or incurred to ascertain the existence, location, extent, or quality of any ore or mineral (including oil and gas) are not subject to this capitalization and amortization rule.⁵⁴

QSB election to offset payroll tax

With this background on the allowance and limitations of the research credit, it is apparent that many businesses with otherwise qualifying expenditures will not benefit under the general rules, particularly startup businesses with little, if any, taxable income. Under Sec. 47(h), a QSB may elect for any tax year to treat all or a portion of its research credit as a credit against its OASDI liability,⁵⁵ subject to certain dollar and tax-year limits described below.

If an election under Sec. 47(h) is made, the research credit is not treated as an income tax credit except for the rules of Sec. 280C, which precludes the amount of the claimed credit from being deducted or capitalized for income tax purposes. Similarly, any amount claimed as a credit against the payroll tax is not allowable as a payroll tax deduction.⁵⁶

Gross receipts test

A partnership, corporation (including an S corporation but not an organization exempt from tax under Sec. 501),⁵⁷ or other person is a QSB if the entity's or person's gross receipts for a tax year are less than $5 million and the taxpayer had no gross receipts before the five-year period ending with the tax year.⁵⁸ Thus, a taxpayer need not be in existence for five years to elect Sec. 41(h), but the five-year rule effectively limits the credit to startup businesses.

In measuring the $5 million limit, returns and allowances and any predecessor entities are taken into account in determining gross receipts for a tax year.⁵⁹ Rules used in determining the base amount in measuring the regular research credit do not apply.⁶⁰ Where an entity's tax year is less than 12 months, gross receipts are annualized by multiplying the receipts for the short period by 12 and dividing the result by the number of months in the short period.⁶¹

Example 1:For the first five years of its existence, X corporation had gross receipts of $1,000,000, $7,000,000, $4,000,000, $3,000,000, and $4,000,000. X is a QSB for year 5 because its gross receipts are less than $5,000,000, even though its gross receipts exceeded the limitation for a prior year. However, X cannot be a QSB in year 6 under any circ*mstances.⁶²

For an individual with a QSB sole proprietorship, all the rules described above apply and the aggregate of all the individual's trades or businesses are taken into account in measuring the $5 million gross receipts limit.⁶³

Payroll tax credit portion

Once a taxpayer qualifies as a QSB, it may elect to use all or a portion of its research credit determined under Sec. 41(a) to offset the taxpayer's OASDI. The amount of the credit is the least of:⁶⁴

• The amount specified by the taxpayer in its election not to exceed $250,000;⁶⁵
• The actual research credit for the year determined under Sec. 41(a);⁶⁶
• For a QSB other than a partnership or S corporation, the amount of the business credit carryforward for the tax year (before application of Sec. 41(h)) under Sec. 39.⁶⁷

Controlled group

In determining the dollar limits of the payroll tax credit as well as measuring the $5 million gross receipts limit, all persons that are members of a "controlled group" are treated as a single taxpayer.⁶⁸ For this purpose, membership in a controlled group includes parent-subsidiary groups, brother-sister groups, and combinations of the two.⁶⁹ Furthermore, all trades or businesses, whether or not incorporated, under common control are treated as a single taxpayer.⁷⁰

Under this aggregation rule, the entire group computes its research credit as a single entity and then allocates it among members based on their relative dollar amounts of the aggregate qualified research expenses upon which the credit is based.⁷¹

Example 2: Corporations X, Y, and Z are members of a controlled group in year 5. The gross receipts over the existence of the corporations are as shown in the table "Controlled Group Gross Receipts in Example2." X, Y, and Z are not QSBs for year 6 because the aggregate gross receipts of the controlled group for year 6 exceed $5 million. In addition, the corporations are not QSBs in year 6 because Z had gross receipts in year 1, i.e., before the five-year period ending with year 6.⁷²

Members of a controlled group that constitute a single taxpayer may separately make the payroll tax credit election for any tax year so long as the overall group meets the requirements to be a QSB.⁷³ Thus, each member of a controlled group can separately elect to offset its allocable share of the group's research credit subject to that member's allocable share of the $250,000 limit and, for an electing member that is not a partnership or S corporation, the electing member's business credit carryforward.⁷⁴

For this purpose, the allocable share of a member's credit and of the $250,000 limit is in proportion to its share of the controlled group's aggregate QREs.⁷⁵ Thus, the amounts allocated to a member of a controlled group are made without regard to whether any other member of the controlled group made a payroll tax credit election.⁷⁶

Example 3: X, Y, and Z are QSBs and members of a controlled group. X and Y, but not Z, make payroll tax credit elections for a tax year. The total research credit for the group is $300,000, allocated $60,000 to X, $90,000 to Y, and $150,000 to Z based upon each member's proportionate share of the group's aggregate QREs. In the same manner X, Y, and Z are allocated $50,000, $75,000, and $125,000 of the $250,000 limitation. Consequently, X and Y have $10,000 and $15,000 of available income tax credits. Because Z did not make an election, it has an income tax credit available of $150,000.⁷⁷

The IRS is authorized to prescribe regulations necessary to prevent the avoidance of the election's aggregation rules through the use of successor companies or other means.⁷⁸

Five-year limitation

A payroll tax credit election under Sec. 41(h) can only be made for a tax year if the taxpayer did not have gross receipts determined under Secs. 448(c)(3)(B), (C), and (D) for any tax year preceding the five tax years ending with the year of the election.⁷⁹

Example 4: X corporation is a QSB in tax years 1-6. X is eligible to make a Sec. 41(h) election in year 6 if it had no gross receipts in year 1.

Similarly, an election cannot be made by a member of a controlled group if any member of that group made an election for five or more preceding tax years.⁸⁰

Example 5: Y and Z corporations are QSBs and members of a controlled group of businesses treated as a single taxpayer for years 1-5. X corporation, a QSB, joined the controlled group in year 5.Y made the Sec. 41(h) elections in years 1-5. Neither X nor Z may make the election in year 6.

Making the election

To make the Sec. 41(h) payroll tax credit election, the taxpayer completes Section D, "Qualified Small Business Payroll Tax Election and Payroll Tax Credit," of Form 6765, attaching the form to the taxpayer's timely filed (including extensions) return for the tax year to which the election applies.⁸¹

Section D of Form 6765 requires checking a box declaring the filer to be a QSB (line 41) and then entering the portion of the research credit that the filer elects as a payroll credit, not to exceed $250,000 (line 42). For filers that are not partnerships or S corporations, the filer is to report its general business credit carryforward, if any (line 43). Finally, the filer reports, in the case of a partnership or S corporation, the lesser of the calculated research credit or the portion (up to $250,000) of the credit elected to offset payroll tax. In the case of an individual, the filer reports the least of the calculated credit, the amount of the election (up to $250,000), or the filer's general business credit carryforward (line 44).

For a partnership or S corporation, the Form 6765 is attached to the entity's timely (including extensions) filed return,⁸² i.e., a Form 1065, U.S. Return of Partnership Income, for a partnership⁸³ or a Form 1120S, U.S. Income Tax Return for an S Corporation, for an S corporation.⁸⁴ If the QSB is an individual, the Form 6765 is attached to the individual's return.⁸⁵ Any election may be revoked only with IRS consent.⁸⁶ Finally, the IRS is to promulgate regulations to minimize compliance and recordkeeping burdens under the election⁸⁷ and to provide rules for recapturing the payroll tax credit, including the filing of amended returns, if there is a later adjustment to the credit.⁸⁸

All filers completing Section D of Form 6765 transfer the payroll tax credit to line 5 of Form 8974, Qualified Small Business Payroll Tax Credit for Increasing Research Activities. Part 2 of Form 8974 determines the amount of the payroll tax credit on the Form 6765 that is credited against the taxpayer's payroll tax for the applicable quarter for which the Form 941, Employer's Quarterly Federal Tax Return, is filed. Thus, line 6 reduces the amount of credit by the amount claimed in previous quarters, and line 11 reduces the payroll tax to the portion paid by the employer.⁸⁹

In cases where the taxpayer's employer identification number (EIN) on its Form 941 differs from the taxpayer's EIN on the Form 6765, the Form 8974 requires the reporting of the EIN used on the Form 6765.⁹⁰

The Form 8974 is attached to the Form 941 for the first quarter that begins after the taxpayer files its income tax return with the Form 6765.⁹¹

Example 6:A QSB timely files its income tax return on April 10, 2018, with Form 6765 attached claiming the payroll tax credit. The QSB claims the payroll tax credit on its Form 941 (with the Form 8974 attached) for the third quarter of 2018.

Where a QSB files only an annual employment tax return,⁹² the payroll tax credit is claimed on its return that includes the first quarter beginning after the date on which the QSB files its income tax return reflecting the election.⁹³

Finally, where the payroll tax credit determined on Forms 8974 and credited on Form 941 exceeds the employer portion of the OASDI tax for a quarter, the excess is carried over to the next calendar quarter(s) subject to the same limitations for the subsequent quarter(s).⁹⁴

Unanswered questions

Sec. 41(h)(6)(A) directs the IRS to prescribe regulations to prevent taxpayers from circumventing the limitations and aggregation rules of Sec. 41(h) through successor companies. In defining "successor company," the IRS should consider the related-party rules of Secs. 267 and 318 to measure whether an entity is the successor of another. In addition, drafters of Sec. 41(h) regulations should consider the rules of Sec. 382 for measuring ownership changes for curtailing a net operating loss where one shareholder group replaces another group such that, in effect, a new corporation comes into existence. Alternatively, similar to the regulations under Secs. 482 and 957, regulations under Sec. 41(h) might simply provide an open-ended facts-and-circ*mstances standard for determining when Sec. 41(h) is being improperly avoided.⁹⁵

Sec. 41(h)(6)(C) grants the IRS authority to provide rules for recapturing the benefit of the payroll tax credit in cases where there is a subsequent adjustment to the credit. Whether the need for recapturing the benefit arises from an IRS audit or a finding that the election itself is invalid, the existing procedures for assessment and collection of federal income and employment taxes appear appropriate for the administration of this income tax credit that is converted to a payroll tax credit.

Finally, although the statute of limitation for assessment under Sec. 6501 may end at different times for the income tax return determining the credit and the payroll tax return where the credit is claimed, this difference should not impede the proper determination of the credit on Forms 8974 and 941 if the statute of limitation remains open for the quarter(s) the credit is claimed. For example, the law is well-settled that an adjustment to the distributive share of income from an S corporation to an individual shareholder may be changed on the individual's return if the individual's statute of limitation remains open regardless of whether the statute is closed on the return filed by the S corporation.⁹⁶ This same rule can be adopted where the credit is determined on an income tax return whose tax year is closed, but is claimed on an employment tax return whose tax year remains open.

Great opportunity for startups

This description of the requirements for using an income tax credit against payroll tax is a unique opportunity for frequently cash-strapped small startup businesses. This article shows that the compliance steps for completing the Form 6765 to compute the research credit and the Form 8974 to determine the amount of credit that may reduce the employer's OASDI are neither so cumbersome nor complex as to discourage small businesses from quickly and easily complying. In short, small businesses incurring qualified research expenses that do not currently have an income tax obligation should consider this mostly overlooked planning option.

Footnotes

¹The credit was first enacted as Sec. 44F during President Ronald Reagan's administration (Economic Recovery Tax Act of 1981 (ERTA), P.L. 97-34). It was moved to Sec. 30 in 1984 by the Deficit Reduction Act of 1984, P.L. 98-369. The provision finally became Sec. 41 in 1986 (Tax Reform Act of 1986, P.L. 99-514).

²The Protecting Americans From Tax Hikes Act of 2015 (PATH), P.L. 114-113, Div. Q, §121, striking former Sec. 41(h) and replacing it with a new Sec. 41(h) and adding Sec. 3111(f).

³Sec. 3111(f).

⁴The revenue impact to the government from the PATH Act's change to Sec. 41(h) cannot be determined because the legislation also made the research credit permanent and creditable against the alternative minimum tax for small businesses with these changes listed together as one revenue estimate. See Joint Committee on Taxation, Estimated Budget Effects of Division Q of Amendment #2 to the Senate Amendment to H.R. 2029 (Rules Committee Print 114-40), The "Protecting Americans From Tax Hikes Act of 2015" (JCX-143-15) (Dec. 16, 2015), estimating a revenue loss of over $113 billion over the 2016—2025 period from the changes made by the PATH Act to Sec. 41.

⁵For a detailed discussion of the expenditures qualifying for the research credit and the calculation of the credit itself, see Fox, et al., BNA Tax Management U.S. Income Portfolios 556-2d, Research and Development Expenditures (2016).

⁶Sec. 41(a). Congress intended the credit to "stimulate a higher rate of capital formation and to increase productivity" (S. Rep't No. 97-144, 1981-2 C.B. 412, 438-439; H.R. Rep't No. 97-201, 1981-2 C.B. 352, 358), and "to encourage business firms to perform the research necessary to increase the innovative qualities and efficiency of the U.S. economy" (S. Rep't No. 99-313, 1986-3 C.B. (Vol. 3) 1, 694; H.R. Rep't No. 99-426, 1986-3 C.B. (Vol. 2) 1, 177).

⁷Sec. 41(b)(1).

⁸Sec. 41(b)(2).

⁹Sec. 41(b)(2)(A)(i).

¹⁰Sec. 41(b)(2)(A)(ii).

¹¹Sec. 41(b)(2)(A)(iii).

¹²Sec. 41(b)(3)(A).

¹³Sec. 41(d)(1).

¹⁴These tests are separately applied to each "business component of the taxpayer" (Sec. 41(d)(2)(A)). A business component is any product, process, computer software, technique, formula, or invention that the taxpayer holds for sale, lease, or license or otherwise uses in its trade or business (Sec. 41(d)(2)(B)).

¹⁵Sec. 41(d)(1)(A).

¹⁶Sec. 41(d)(1)(B)(i). See H.R. Conf. Rep't No. 99-841, 1986-3 C.B. (Vol. 4) 1, 71-72.

¹⁷Sec. 41(d)(1)(C). Research relating to style, taste, cosmetic, or seasonal design factors is not a qualified purpose under the process-of-experimentation test and therefore not qualified research (Sec. 41(d)(3)(B)).

¹⁸Sec. 41(d)(1)(B)(ii). To be useful for this purpose, the research need only provide some level of functional improvement to the taxpayer (Norwest Corp., 110 T.C. 454, 495 (1998)).

¹⁹Sec. 41(d)(4)(D)(i).

²⁰Sec. 41(d)(4)(D)(ii).

²¹Sec. 41(d)(4)(D)(iii).

²²Sec. 41(d)(4)(D)(iv).

²³Sec. 41(d)(4)(D)(v).

²⁴Sec. 41(d)(4)(A).

²⁵Secs. 41(d)(4)(B) and (C).

²⁶Sec. 41(d)(4)(F).

²⁷Sec. 41(d)(4)(G).

²⁸Sec. 41(d)(4)(H).

²⁹Sec. 41(a).

³⁰The fixed-base percentage (for companies other than startup companies) is the percentage that the aggregate QREs of the taxpayer for certain years (base period) is of the aggregate gross receipts of the taxpayer for those years (Secs. 41(c)(3)(A)). For startup companies, as defined in Sec. 41(c)(3)(B)(i), it is calculated with a phase-in as described in Sec. 41(c)(3)(B)(ii). For all companies, the maximum fixed-base percentage amount is 16% (Sec. 41(c)(3)(C)).

³¹Sec. 41(c)(1).

³²Sec. 41(c)(2).

³³Sec. 41(c)(5); Regs. Sec. 1.41-8.

³⁴Sec. 38(b)(4).

³⁵Sec. 38(c)(1). For married taxpayers filing separately this specified amount is $12,500 (Sec. 38(c)(6)(A)).

³⁶Id.

³⁷Id.

³⁸Sec. 38(c)(5)(C). Gross receipts for this purpose are defined under Secs. 448(c)(2) and (3) and Temp. Regs. Sec. 1.448-1T(f)(2)(iv).

³⁹Sec. 38(c)(5)(D).

⁴⁰Sec. 39(a)(1).

⁴¹Sec. 196(a).

⁴²Form 6765 is also used to elect the simplified alternative credit.

⁴³See instructions to Form 6765.

⁴⁴See Regs. Sec. 1.174-1.

⁴⁵Sec. 174(e).

⁴⁶Regs. Sec. 1.174-2(a)(1).

⁴⁷Regs. Secs. 1.174-2(a)(1) and (2). Whether uncertainty exists is an objective test that depends on the information available to the taxpayer. See Union Carbide Corp., T.C. Memo. 2009-50 at *195-*196, citing Mayrath, 41 T.C. 582, 590-591 (1974), aff'd, 357 F.2d 209 (5th Cir. 1966).

⁴⁸Sec. 39.

⁴⁹Sec. 280C(c)(3). Taxpayers must elect to reduce the allowable research credit by the maximum corporate rate.

⁵⁰P.L. 115-97, §13206(a).

⁵¹Sec. 174(a)(2), as in effect after Dec. 31, 2021.

⁵²Sec. 174(b), as in effect after Dec. 31, 2021. See Regs. Sec. 1.174-2 for a detailed description of research and experimental expenditures.

⁵³Sec. 174(c), as in effect after Dec. 31, 2021. Note that the depreciation or depletion allowance for depreciable or depletable property is a specified research and experimental expenditure.

⁵⁴Id.

⁵⁵Sec. 3111(f).

⁵⁶Sec. 3111(f)(4).

⁵⁷Sec. 41(h)(3)(B). Notice 2017-23, §3.03.

⁵⁸Sec. 41(h)(3)(A)(i)(ii). The definition of gross receipts under Sec. 41(c)(7) and Regs. Sec. 1.41-3(c) does not apply to Sec. 41(h). Therefore, gross receipts for this purpose do not have a de minimis exclusion of $25,000 in Regs. Sec. 1.41-3(c) to measure qualification for the credit.

⁵⁹Sec. 41(h)(3) provides that the rules of Sec. 448(c)(3), except for Sec. 448(c)(3)(A), are to be used in measuring the gross receipts of a business. See Sec. 448(c)(3)(C) reducing gross receipts by returns and allowances and Sec. 448(c)(3)(D) taking predecessor corporations into account in determining whether a corporation meets the gross receipts test. Notice 2017-23, §3.04, also directs that in measuring gross receipts Temp. Regs. Sec. 1.448-1T(f)(2)(iv) be taken into account, and, therefore, interest or other investment income received in connection with the entity's startup capital contributions are included in measuring the $5,000,000 threshold of Sec. 41(h).

⁶⁰Regs. Sec. 1.41-3(c).

⁶¹Sec. 448(c)(3)(B).

⁶²Notice 2017-23, §3.06(1).

⁶³Secs. 41(h)(3)(A)(i)(I) and (ii)(II); Notice 2017-23, §3.02.

⁶⁴Sec. 41(h)(2).

⁶⁵Sec. 41(h)(2)(A).

⁶⁶Sec. 41(h)(2)(B).

⁶⁷Sec. 41(h)(2)(C).

⁶⁸Sec. 41(h)(5)(A), referring to the rules of Sec. 41(f).

⁶⁹Sec. 41(f)(5) refers to the rules of Sec. 1563(a), replacing the 80% stock ownership test of that section with a 50% test.In addition, Sec. 41(f)(1)(B) and Regs. Sec. 1.41-7(b) authorize the IRS to promulgate rules treating all trades and businesses under common control as a single taxpayer, including related sole proprietorships, partnerships, trusts, and estates.

⁷⁰See Joint Committee on Taxation, Explanation of the Protecting Americans From Tax Hikes Act of 2015 (JCX-144-15), p. 31, fn. 74 (Dec. 17, 2015). Regs. Sec. 1.41-6(a)(3)(ii) furthermore provides that the term "controlled group" includes any group of trades or businesses under common control referring to regulations under the work opportunity credit for guidance. See Regs. Secs. 1.52-1(b)-(g).

⁷¹Sec. 41(f)(1)(A)(ii). See Regs. Secs. 1.41-6(d)(1) and 1.41-6(e), Example 1.

⁷²Notice 2017-23, §3.06.

⁷³Sec. 41(h)(5)(B)(i).

⁷⁴See Notice 2017-23, §4.05(2)(ii).

⁷⁵Secs. 41(f)(1)(A)(ii) and (B)(ii); Regs. Sec. 1.41-6(c).

⁷⁶For detailed discussion of Sec. 41(f)(1)'s rules governing the allocation of the research credit for members of the same controlled group of corporations and members of the same group of commonly controlled trades or business, see Fox, et al., BNA Tax Management U.S. Income Portfolios 556-2d, Research and Development Expenditures (2016).

⁷⁷Notice 2017-23, §4.05(4).

⁷⁸Sec. 41(h)(6)(A).

⁷⁹Sec. 41(h)(3)(A)(ii).

⁸⁰Notice 2017-23, §4.04, citing to Regs. Sec. 1.41-6(a)(3)(ii).

⁸¹Notice 2017-23, §4.02.

⁸²Sec. 41(h)(4)(C).

⁸³Sec. 41(h)(4)(A)(ii)(I) provides that the partnership is to attach the Form 6765 to the return required by Sec. 6031.

⁸⁴Sec. 41(h)(4)(A)(ii)(II) provides that the S corporation is to attach the Form 6765 to the return required by Sec. 6037.

⁸⁵Sec. 41(h)(4)(A)(ii)(III).

⁸⁶Sec. 41(h)(4)(A)(iii).

⁸⁷Sec. 41(h)(6)(B).

⁸⁸Sec. 41(h)(6)(C).

⁸⁹Line 11 is also used to report additional adjustments made for cases where third-party sick pay was paid and where an adjustment was made by the IRS to the employer's share of Social Security tax.

⁹⁰Notice 2017-23, §4.06.

⁹¹Id.

⁹²Form 944, Employer's Annual Federal Tax Return, is intended for employers whose annual Social Security, Medicare, and withheld federal income tax is $1,000 or less.

⁹³Notice 2017-23, §4.06.

⁹⁴Id.

⁹⁵See Regs. Sec. 1.957-1(b), providing that in determining whether U.S. shareholders control a foreign corporation, consideration will be given to "all the facts and circ*mstances of each case." Similarly, Regs. Sec. 1.482-1(i)(4) provides that in determining if one taxpayer controls another for transfer-pricing purposes, control includes "any kind of control, direct or indirect, whether legally enforceable or not and however exercisable or exercised, including control resulting from the actions of two or more taxpayers acting in concert or with a common goal or purpose."

⁹⁶Bufferd, 506 U.S. 523 (1993), aff'g 952 F.2d 675 (2d Cir. 1992). See Sommers, "How Long Can This Go On? The Controversy Over the Application of the Statute of Limitations to S Corporations and Their Shareholders," 21 Pepp. L. Rev. 1 (1994).