Benjamin Dyches
Mar 8, 20222 min
The following is intended for informational purposes only and not legal advice. For specific advice please connect with one of our advisors or your tax preparer.
Suppose a client reported a 50% tax bracket where a $50,000 deduction could yield about $25,000 in deductions. That same $50,000 expense is worth about $5,000 in R&D credits.
The answer seems straighforward until you consider Section 280C(c)(3).
Generally speaking, a taxpayer must add the amount of the Credit back into taxable income via an M-1 Adjustment. However, IRC 280C(c)(3) provides taxpayers with the ability to take a “reduced” R&D Tax Credit and forego the M-1 add-back (i.e., keep the deduction). [1] Utilizing Section 280 reduces the credit by 21%.
If (taxpayers) wish to retain their full deduction for research expenses, they must take a reduced R&D tax credit. They can make such an election under Sec. 280C(c)(3), and it may be a desirable option in some circumstances, especially because taxpayers that elect a reduced credit will keep more of the credit than they did previously. [2]
In many cases, individual taxpayers (i.e., owners of pass-through businesses) with effective federal income tax rates of more than 21 percent will see a larger overall benefit via the 280C election. Further, the 280C election would also negate some adverse state income tax effects of claiming the R&D Credit, as well as providing simplification for return preparers. [3]
How does the election impact their credit? See below:
Using Section 280C, this client keeps the $25,000 deduction benefit and receives $19,750 in R&D credits.
In most cases, yes. However, there is no "one-size-fits-all" when considering which path is better for your tax benefit. We work with your accounting team to evaluate whether the Section 280C election is the best fit. When we talk to our clients about R&D benefits, we make a point of giving them the "after 280C" net benefit to provide an accurate ROI picture.
To learn more, please schedule an intro call through this link, by email (welcome@drtaxcredit.com), or with a quick phone call (801-318-5097).