No, there does not appear to be any requirement to reduce labor expenses if you take the research credit. While research credits and the payroll tax credit are included on Form 6765, they are different types of credits. The research credit is generally allowed for expenses paid or incurred for qualified research. Qualified research means research for which expenses may be treated as section 174 expenses. This research must be undertaken for discovering information that is technological in nature, and its application must be intended for use in developing a new or improved business component of the taxpayer.
It is important to keep in mind what qualified research does not include. In this regard, the research credit is not allowed for the following activities:
• Research conducted after the beginning of commercial production.
• Research adapting an existing product or process to a particular customer’s need.
• Duplication of an existing product or process.
• Surveys or studies.
• Research relating to certain internal-use computer software.
• Research conducted outside the United States, Puerto Rico, or a U.S. possession.
• Research in the social sciences, arts, or humanities.
• Research funded by another person (or governmental entity)
The payroll tax credit election is an annual election made by a qualified small business specifying the amount of research credit, not to exceed $250,000, that may be used against the employer portion of social security liability. The credit is the smallest of the current year research credit, an elected amount not to exceed $250,000, or the general business credit carryforward for the tax year (before the application of the payroll tax credit election for the tax year).
The election must be made on or before the due date of the originally filed income tax return (including extensions). An election can’t be made for a tax year if an election was made for 5 or more preceding tax years. The election made by a partnership or S corporation is made at the entity level. Any election to take the payroll tax credit may be revoked only with the consent of the IRS.
Here is a link to the IRS instructions for Form 6765 which you might find helpful.
Credit for Increasing Research Activities
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