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

Instructions for Form 8974
(January 2017)

Department of the Treasury
Internal Revenue Service

Qualified Small Business Payroll Tax Credit for Increasing Research Activities

Future Developments

each client that is taking the qualified small business
payroll tax credit for increasing research activities. See
the instructions for line 8 and line 9, later, for more
information.

General Instructions

If you discover an error on a previously filed Form 8974,
make the correction by filing Form 941-X, Adjusted
Employer’s QUARTERLY Federal Tax Return or Claim for
Refund, with a corrected Form 8974. For more
information, see the Instructions for Form 941-X.

Section references are to the Internal Revenue Code
unless otherwise noted.
For the latest information about developments related to
Form 8974 and its instructions, such as legislation
enacted after they were published, go to IRS.gov/
form8974.

Purpose of Form 8974

Use Form 8974 to determine the amount of the qualified
small business payroll tax credit for increasing research
activities that you can claim on Form 941, Employer’s
QUARTERLY Federal Tax Return; Form 941-SS,
Employer’s QUARTERLY Federal Tax Return (American
Samoa, Guam, the Commonwealth of the Northern
Mariana Islands, and the U.S. Virgin Islands); or Form
941-PR, Planilla para la Declaración Federal
TRIMESTRAL del Patrono. This payroll tax credit is a
credit against the employer portion of social security tax
on the wages of your employees.
All references to Form 941 in these instructions also
apply to Forms 941-SS and 941-PR.
Form 943 and Form 944 filers. If you file Form 943,
Employer’s Annual Federal Tax Return for Agricultural
Employees, or Form 944, Employer’s ANNUAL Federal
Tax Return, Form 8974 and these instructions will be
revised at the end of 2017 to provide instructions for you
to claim the credit.

Who Must File Form 8974?

You must file Form 8974 and attach it to Form 941 if you
made an election on your income tax return to take a
portion of the qualified small business payroll tax credit for
increasing research activities against your payroll taxes.
The election is made on Form 6765, Credit for Increasing
Research Activities. If you haven’t filed the income tax
return making the election to claim the payroll tax credit on
Form 6765, you can’t file Form 8974 and can’t claim the
qualified small business payroll tax credit for increasing
research activities against your payroll taxes on Form 941.
You can’t claim the qualified small business
payroll tax credit for increasing research activities
CAUTION on a Form 941 unless you make the election on
Form 6765 and file Form 8974 and attach it to Form 941.

!

Aggregate Form 941

If you’re a Section 3504 agent or a Certified Professional
Employer Organization (CPEO), you must complete
Schedule R (Form 941), Allocation Schedule for
Aggregate Form 941 Filers, when filing an aggregate
Form 941. Additionally, you must attach a Form 8974 for
Mar 16, 2017

Correcting Form 8974

When Must You File?

Form 8974 is filed with Form 941. You can first claim the
qualified small business payroll tax credit for increasing
research activities on the Form 941 for the quarter that
begins after you file your income tax return that makes the
election on Form 6765. The Form 941 for that quarter is
the Form 941 on which you are required to claim the
qualified small business payroll tax credit for increasing
research activities for the amount elected as a research
payroll tax credit on Form 6765. You can’t claim the credit
related to this election on a different quarter’s Form 941
unless it is to take a carryforward credit from the required
quarter, as determined on Form 8974.
Example. If you file your 2016 income tax return
based on a calendar year (January 1–December 31) on
March 15, 2017, the 2017 second quarter (April 1, 2017–
June 30, 2017) Form 941, which is filed by July 31, 2017,
is the first quarter that you can take the qualified small
business payroll tax credit for increasing research
activities.

Specific Instructions
Enter Your Business Information

Enter your employer identification number (EIN) and name
at the top of Form 8974. Make sure that they exactly
match the name of your business and the EIN that the IRS
assigned to your business and also match the name and
EIN shown on Form 941. Also check a box to tell us on
which form you'll take the credit from Part 2, line 12.

Calendar Year

Enter the calendar year as shown on the attached Form
941.

Check the Box for the Quarter

Under Report for this quarter at the top of Form 8974,
check the appropriate box of the quarter for which you’re
filing Form 8974. The quarter must match the quarter as
shown on Form 941.

Cat. No. 68750R

Part 1: Tell Us About Your Income Tax
Return

that quarter (the next quarter), then you can carryforward
any unused amount to the quarter after the next quarter.
For subsequent quarters, if the qualified small business
payroll tax credit for increasing research activities on
line 7 can’t be fully used in the quarter, you can
carryforward any unused amount to the following quarter.

Line 1

Tell us which income tax return you filed that elected a
qualified small business payroll tax credit on Form 6765.
Form 6765 can only be attached to Form 1040, 1065,
1120, 1120-F, or 1120S.

Example. You elected to take $100,000 as a qualified
small business payroll tax credit for increasing research
activities when you filed your 2016 income tax return on
March 15, 2017. On the Form 8974 that you attach to your
second quarter 2017 Form 941, you enter $100,000 on
line 5 and leave line 6 blank because the second quarter
of 2017 is the first time you’re using the elected amount
from your 2016 income tax return. You complete lines 7–
12 and learn that you can only use $75,000 of the credit
for the second quarter of 2017. You have a $25,000
carryforward to the third quarter of 2017.
On the Form 8974 that you attach to your third quarter
2017 Form 941, you will complete Part 1 with the same
information (your 2016 income tax return information) that
you reported for the second quarter of 2017. You will enter
$100,000 on line 5 (same as you did for the second
quarter of 2017) but you now must also enter $75,000 on
line 6 because this is the amount of the credit on line 5
that you claimed in a previous period.

Line 2

Tell us which tax period was covered by the income tax
return shown on line 1. If your income tax return was for a
calendar year, enter the year as “YYYY” (for example,
2016). If your income tax return was for a fiscal year, enter
the date the tax year began and ended as “MM/DD/YYYY”
(for example, tax year beginning 07/01/2016 ending
06/30/2017).

Line 3

Tell us the date that you filed your income tax return that is
shown on line 1. Enter the date as “MM/DD/YYYY” (for
example, 03/15/2017).

Line 4

If the EIN used on Form 8974 isn’t the same as the EIN
used on Form 6765, enter the EIN that was used on Form
6765. Generally, the EIN used on Form 8974 should be
the same as the EIN used on Form 6765. However, if
you’re a member of a controlled group of corporations (as
defined in section 41(f)(1)(A) and (f)(5)) or a member of a
group of trades or businesses under common control (as
defined in section 41(f)(1)(B) and Regulations section
1.41-6(a)(3)(ii)), the EIN used on Form 6765 may be
different from the EIN that you must use on Form 8974.

Line 7

Subtract line 6 from line 5. Enter the result on line 7.

Line 8

Enter the amount from Form 941, line 5a, column 2. This
is the total amount of social security tax on wages.
If you’re filing an aggregate Form 941, you must
prepare a Form 8974 for each client that is taking
CAUTION the qualified small business payroll tax credit for
increasing research activities. Also, you can’t enter the
amount from Form 941, line 5a, column 2, on line 8 of any
of the Forms 8974 that are attached to the aggregate
Form 941. The credit is based on each employer’s liability
for social security tax. Therefore, you must enter on line 8
of each client’s Form 8974 the amount that the client
would’ve reported on Form 941, line 5a, column 2, if the
client filed its own Form 941.

!

Part 2: Determine the Credit That You
Can Use This Period
Line 5

Generally, enter the amount from Form 6765, line 44.
However, if you’re a member of a controlled group of
corporations (as defined in section 41(f)(1)(A) and (f)(5))
or a member of a group of trades or businesses under
common control (as defined in section 41(f)(1)(B) and
Regulations section 1.41-6(a)(3)(ii)), enter the amount of
the credit that was allocated to your EIN. As a member,
your credit is determined on a proportionate basis to your
share of the aggregate qualified research expenses for
increasing research activities taken into account by the
group for the research credit.

Line 9

Enter the amount from Form 941, line 5b, column 2. This
is the total amount of social security tax on tips for the
quarter.
If you’re filing an aggregate Form 941, you must
prepare a Form 8974 for each client that is taking
CAUTION the qualified small business payroll tax credit for
increasing research activities. Also, you can’t enter the
amount from Form 941, line 5b, column 2, on line 9 of any
of the Forms 8974 that are attached to the aggregate
Form 941. The credit is based on each employer’s liability
for social security tax. Therefore, you must enter on line 9
of each client’s Form 8974 the amount that the client
would’ve reported on Form 941, line 5b, column 2, if the
client filed its own Form 941.

!

Line 6

Enter the amount of the credit from line 5 that was taken in
a previous period or previous periods.

Carryforward. If the qualified small business payroll tax
credit for increasing research activities reported on line 5
can’t be fully used in the first quarter after the income tax
return is filed, you can carryforward any unused amount to
the next quarter. If, in the next quarter the amount carried
over from the first quarter can’t be fully used because of
the limit to the employer social security tax on wages for
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Instructions for Form 8974 (1-2017)

Line 10

Example. You entered $12,400 on line 8 and zero on
line 9. Line 10 was also $12,400. 50% of line 10 is $6,200.
However, this amount must be adjusted because the
amount from Form 941, line 5a, column 2, that was
entered on line 8 included the employer’s share of social
security tax that you paid for the wages paid to your
client’s employees. There isn’t a line on Form 941 that can
assist in this calculation but you still must determine the
amount of Form 941, line 5a, column 2, that was for
wages paid to your client’s employees. For purposes of
this example, if you determine that $5,000 of employer’s
social security tax included on Form 941, line 5a, column
2, was attributable to your client’s employees, you must
subtract $5,000 from $6,200 (50% of the amount reported
on line 10) and enter $1,200 on line 11.

Add lines 8 and 9. Enter the result on line 10.

Line 11

Multiply line 10 by 50% (0.50). The qualified small
business payroll tax credit for increasing research
activities can only be used against the employer’s share of
social security tax reported on Form 941. The amount on
line 10 is the total amount of social security tax (both the
employer and employee share) so you must multiply
line 10 by 50% to limit the credit to the employer’s share of
social security tax. See the instructions below if you are a
third-party payer of sick pay or you received a Section
3121(q) Notice and Demand.

Third-Party Payers of Sick pay
You can only take the qualified small business payroll tax
credit for increasing research activities against the
employer’s share of social security tax on wages paid to
your employees. Because the amount entered on line 8
included social security tax for your clients’ employees,
you must make an adjustment to the amount reported on
line 11.

Section 3121(q) Notice and Demand
If you received a Section 3121(q) Notice and Demand
(Letter 3263 or Letter 4520) during the quarter, you report
the amount for the employer’s share of social security tax
and Medicare tax on Form 941, line 5f. Letter 3263 or
Letter 4520 includes an attachment that shows the
employer’s share of social security tax. You must add the
employer’s share of social security tax to the amount
reported on line 11.

Adjustment if you transferred liability. If you
transferred the liability for the employer’s share of social
security tax to the employer (client), you must reduce the
amount reported on line 11 by the amount of social
security tax included on Form 941, line 8. Don’t just
subtract the amount reported on Form 941, line 8,
because that line includes both social security tax and
Medicare tax.

Line 11 (before considering a Section 3121(q) Notice and
Demand)
+ Employer’s share of social security tax from Letter 3263 or
Letter 4520
= Final Amount to enter on line 11

Line 11 (before considering Form 941, line 8)
– Amount of social security tax included on Form 941, line 8

Example. You entered $6,200 on line 8 and $12,400
on line 9. Line 10 was $18,600. 50% of line 10 is $9,300,
but you also reported an amount on Form 941, line 5f,
because you received Letter 3263. Letter 3263 showed
unreported tips of $20,000 and tax due of $1,530. The
attachment to Letter 3263 listed your liability for tax on
unreported tips as follows.
Employer’ share of social security tax: $1,240
Employer’s share of Medicare tax: $290
You must add $1,240 (employer’s share of social security
tax from Letter 3263) to $9,300 (50% of the amount
reported on line 10) and enter $10,540 on line 11.

= Final Amount to enter on line 11

Example. You entered $12,400 on line 8 and zero on
line 9. Line 10 was also $12,400. 50% of line 10 is $6,200.
However, this amount must be adjusted because you
reported $6,120 ($4,960 of social security tax and $1,160
of Medicare tax) on Form 941, line 8. You must subtract
$4,960 (amount of social security tax reported on Form
941, line 8) from $6,200 (50% of the amount reported on
line 10) and enter $1,240 on line 11.

Line 12

Adjustment if you didn’t transfer liability. If you didn’t
transfer the liability for the employer’s share of social
security tax to the employer (client) and you paid the
employer social security tax on the third-party sick pay
that you paid on behalf of the client, you must reduce the
amount reported on line 11 by any employer social
security tax (included on line 5a) that was for the
employees of the client.

Enter the smaller of line 7 or line 11. Also enter this
amount on Form 941, line 11. If line 12 is less than line 7,
the remaining amount can be used on a Form 8974 for the
next quarter.
Paperwork Reduction Act Notice. We ask for the
information on Form 8974 to carry out the Internal
Revenue laws of the United States. You are required to
give us the information. We need it to ensure that you are
complying with these laws and to allow us to figure and
collect the right amount of tax.

Line 11
– Amount of employer's share of social security tax included on
Form 941, line 5a, column 2
= Final Amount to enter on line 11

Instructions for Form 8974 (1-2017)

You’re not required to provide the information
requested on a form that is subject to the Paperwork
Reduction Act unless the form displays a valid OMB
control number. Books or records relating to a form or its
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instructions must be retained as long as their contents
may become material in the administration of any Internal
Revenue law. Generally, tax returns and return
information are confidential, as required by Code section
6103.
The time needed to complete and file Form 8974 will
vary depending on individual circumstances. The
estimated average time is:
Recordkeeping . . . . . . . . . . . . . . . . . . . . . . .
Learning about the law or the form . . . . . . . . .
Preparing and sending the form to the IRS . . . .

If you have comments concerning the accuracy of
these time estimates or suggestions for making Form
8974 simpler, we would be happy to hear from you. You
can send us comments from IRS.gov/formcomment. Or
you can write to the Internal Revenue Service, Tax Forms
and Publications Division, 1111 Constitution Ave. NW,
IR-6526, Washington, DC 20224. Don't send Form 8974
to this address. Instead, see Where Should You File? in
the Instructions for Form 941.

45 min.
1 hr.
1 hr.

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Instructions for Form 8974 (1-2017)