Since the corporate tax rate was reduced from 35% to 21% starting in 2018, the federal R&D tax credit has increased by about 21%. This is because businesses are required to either reduce their business deductions by the amount of the gross R&D credit or make a “reduced credit” election in accordance with Internal Revenue Code Section 280C.
Either method will generally result in a net credit increase of about 21% for C-Corporations when compared to prior years. However, pass-through entities will need to make the reduced credit election in order to take advantage of the reduced corporate rate and increased R&D tax credit.
See below for a simplified example:
Because of the reduction in corporate tax rates from 35% to 21%, the taxpayer in the simplified example above will see an increase in their net federal R&D tax credits of about 21% simply by making the reduced credit election.
The 280C reduced credit election can only be made on originally filed tax returns (including those on proper extension) and once elected cannot be later revoked for that tax year on an amended return.
There are scenarios where taxpayers may not want to make the reduced credit election. For example, Qualified Small Businesses (QSBs) that are in losses and claiming a Payroll Tax Credit may want the near-term benefits of the gross R&D credit. Instead of reducing the gross R&D credit, they may want to offset their Net Operating Loss carryforward. We help our clients review these options and consult their CPA to perform this analysis in order to take all tax considerations into account.
Fiscal year taxpayers must calculate the 280C election for the tax year including January 1, 2018, under a “blended rate” outlined in IRC 15(e). For example, a taxpayer with a fiscal year end of 3/31/2018 would calculate the 280C blended rate as follows:
[35% x (275 days/365 days)] + [21% x (90 days/365 days)] = 31.55%.
For more information on how to maximize the tax benefits available to you or your clients, contact BRAYN Consulting at email@example.com or 888-773-8356.