SECTION 4. INTERIM GUIDANCE

FOR ELECTING THE PAYROLL TAX CREDIT

.01 In general .

A qualified small business, as defined in section 3 of this notice, may make a payroll tax credit election in an amount limited as specified in section 4.03 or 4.05(2) of this notice for any taxable year beginning after December 31, 2015. If a qualified small business makes a payroll tax credit election, the amount elected is not treated as a research credit, except for purposes of § 280C.

.02 Time and manner of election .

A qualified small business makes a payroll tax credit election by completing the appropriate portion of Form 6765, Credit for Increasing Research Activities, or successor form, relating to the payroll tax credit election, and attaching the completed form to the qualified small business’s timely filed (including extensions) return for the taxable year to which the election applies. The term

“return” means the return required to be filed under § 6031 in the case of a partnership (for example, the Form 1065 or successor form), the return required to be filed under § 6037 in the case of an S corporation (for example, the Form 1120–S or successor form), and the return with respect to income tax for the taxable year in the case of any other qualified small business.

If a qualified small business timely files its return for a taxable year beginning after December 31, 2015, but fails to make the payroll tax credit election, it may make the election on an amended return filed on or before December 31, 2017. To qualify for this extension, the business must either: 1) indicate on the top of its Form 6765 reflecting the payroll tax credit election that the form is “FILED PURSUANT TO NOTICE 2017–23,” or 2) attach a statement to its Form 6765 reflecting the payroll tax credit election that the form is filed pursuant to Notice 2017–23.

.03 Amount of election .

The amount of any payroll tax credit election may not exceed the least of:

(1) The qualified small business’s research credit for the taxable year (determined before the application of § 41(h)),

(2) $250,000, or (3) In the case of a qualified small business other than a partnership or S corporation, the amount of the qualified small business’s business credit carryforward under § 39 carried from the taxable year (determined before the application of § 41(h)).

.04 Limitation on number of taxable years .

A person may not make a payroll tax credit election for a taxable year if the person (or any other member of the person’s controlled group as defined under § 1.41–6(a)(3)(ii)) has made an election for 5 or more preceding taxable years.

.05 Special rules for controlled groups .

(1) In general.

In the case of a controlled group, as defined under § 1.41–6(a)(3)(ii), each member of the controlled group separately

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year 2016. ABC controlled group calculated its total research credit for taxable year 2016 to be $300,000. Under § 1.41–6T(c), A is allocated $60,000, B is allocated $90,000, and C is allocated $150,000 of the group’s research credit on a proportionate basis to each member’s proportionate share of the controlled group’s aggregate QREs. In the same manner as under § 1.41–6T(c), A is allocated $50,000, B is allocated $75,000, and C is allocated $125,000 of the $250,000 amount for purposes of section 4.05(2)(b) of this notice. For taxable year 2016, the maximum amount that A can elect as a payroll tax credit is $50,000 (the lesser of A’s allocable share of the group’s research credit and A’s allocable share of the $250,000 amount). The maximum amount that B can elect as a payroll tax credit is $75,000 (the lesser of B’s allocable share of the group’s research credit and B’s allocable share of the $250,000 amount). C did not make a payroll tax credit election. If A makes the payroll tax credit election in the amount of $50,000, A still has a research credit available for income tax purposes in the amount of $10,000. If B makes the payroll tax credit election in the amount of $75,000, B still has a research credit available for income tax purposes in the amount of $15,000. Because C did not make the payroll tax credit election, C still has a research credit available for income tax purposes in the amount of $150,000.

.06 Claiming the credit on the employment tax return .

A qualified small business that elects to claim the payroll tax credit and files quarterly employment tax returns, claims the payroll tax credit on its employment tax return for the first quarter that begins after it files the return reflecting the election as specified in section 4.02 of this notice. For example, if a qualified small business files an income tax return on April 10, 2017, with a Form 6765 attached reflecting the payroll tax credit election, the qualified small business would claim the payroll tax credit on its Form 941, Employer’s Quarterly Federal Tax Return, for the third quarter of 2017. A qualified small business that files annual employment tax returns claims the payroll tax credit on its annual employment tax return that includes the first quarter beginning after the date on which the business files the return

reflecting the election as specified in section 4.02 of this notice. A qualified small business claiming the payroll tax credit on its employment tax return must complete Form 8974, Qualified Small Business Payroll Tax Credit for Increasing Research Activities, or successor form, and attach the completed form to that employment tax return. Under various employment tax procedural rules, the Employer Identification Number (EIN) of the taxpayer filing the employment tax return may differ from the EIN of the taxpayer that filed the return with an attached Form 6765 reflecting the election as specified in section 4.02 of this notice. On Form 8974, the taxpayer filing the employment tax return claiming the credit provides the EIN used on the Form 6765 reflecting the election.

The payroll tax credit claimed by an employer on an employment tax return cannot exceed the employer portion of the social security tax for any calendar quarter on wages paid with respect to the employment of all individuals in the employ of the employer. The employer uses Form 8974 to apply this limit to the amount of the payroll tax credit it elected on Form 6765 and to determine the amount of the credit allowed on its employment tax return. If the payroll tax credit elected on Form 6765 exceeds this limitation, then the excess determined on Form 8974 is carried over to the succeeding calendar quarter(s) and allowed as a payroll tax credit for the succeeding quarter(s), subject to the social security tax limitation applicable to the quarter(s).