Need More Time to Claim R&D Credits? This Protective Tax Election Can Help
posted Feb 26, 2019 by Deborah Pallasch, CPA in the Global Tax Blog
Attention taxpayers…are you taking advantage of Research and Development (R&D) Tax Credits? The credit is available to businesses that uncover new, improved, or technologically advanced products, processes, principles, methodologies, or materials. Calculating this credit is often a burdensome process—learn more about how the 280C election can help.
More about the R&D Tax Credit
The Section 41 Credit for Increasing Research Activities (“R&D Credit”) was first introduced by Congress in 1981, with the purpose to reward U.S. companies for increasing spending on research and development within the U.S.
Changes to the R&D credit
Both the PATH Act of 2015 and the TCJA of 2017 made the R&D credit more attractive in various ways to taxpayers, including…
- Allowing small businesses to claim the R&D tax credit against their alternative minimum tax (AMT),
- Allowing qualified businesses to claim the R&D tax credit against their payroll taxes (essentially making it a refundable credit), and
- Repeal of the AMT Corporate tax which had long prevented companies from utilizing R&D tax credits to offset regular tax liability.
More about the R&D tax credit election, otherwise known as the 280C(c)(3) election
Calculating and documenting the R&D Credit is an intricate and often burdensome undertaking. This process can be made even more difficult during the throes of tax season. Fortunately, the Internal Revenue Service has given taxpayers a way to gain additional time to claim a R&D credit: the “protective” 280C(c)(3) election.
Sec. 280C requires taxpayers to reduce their Section 174 deductions by the amount of Section 41 research credit claimed for the tax period, thus preventing a double benefit related to the R&D credit (i.e., expense & credit). Electing the reduced credit under Section 280C is common due to its administrative convenience (no book to tax adjustment), and because it preserves deductions that may reduce state taxes.
Taxpayers may make a “protective“ Section 280C check box election on a timely-filed, but blank, Form 6765 even when the taxpayer has not yet computed its research credit for that year but plans to file an amended return to claim the research credit at a later date.
Unsure if you qualify for R&D credits? Have no fear
For companies that are unsure about whether they have R&D, filing the Form 6765 with the 280C election is a great option while they work with experts to determine whether or not they have expenses that may qualify.
Independent of other considerations, taxpayers subject to the highest corporate tax rate will not see a change in tax liability via the Section 280C(c)(3) election. However, there are multiple areas to consider during the annual tax planning process in deciding whether to make a “protective” 280C election so consulting with your tax professional is always best.
But this tax season in particular, with the numerous tax and form changes many businesses and tax professionals are working through, additional time to claim and substantiate the research credit may be a welcome option and the “protective” 280C election an invaluable solution.
Questions on the R&D tax credit election? Reach out to us.