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Summary: Section 280C(c)(3) provides an in-between option that allows many to utilize supplies in the R&D credit without removing the deduction benefits.
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.
We were recently asked whether it makes more sense to take supplies as a deduction or credit.
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).
If I use supplies for the tax credit can I still deduct them?
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]
In our example, this client could take the $50,000 deduction and the credit, as long as they opted for the Section 280 reduction.
How does the election impact their credit? See below:
R&D Credit | $25,000 |
Credit reduction (sec. 280C(c)(3) | 21% |
Reduced Credit Value | $19,750 |
Using Section 280C, this client keeps the $25,000 deduction benefit and receives $19,750 in R&D credits.
Should I use the Section 280C Election?
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).