Taxpayers who claim research credits under Section 41 are required under Internal Revenue Code Section 280c to reduce their deductions for any expenses. However, corporations can save time and effort by taking the 280c election which reduces the gross credit by the maximum corporate tax rate. This mechanism allows a taxpayer to eliminate the need to add back the credit to recompute tax liability.
Who Does IRC 280c Apply To?
IRC 280c applies to:
- C Corporations
- S Corporations
The IRS states the following as it relates to IRC 280c:
IRC § 280C(c) applies to tax years beginning after December 31, 1988.
IRC Section 280C(c)(1)
Provides that, in general, no deduction is allowed for that portion of the qualified research expenses (as defined in I.R.C. § 41(b)) or basic research expenses (as defined in I.R.C. § 41(e)(2)) otherwise allowable as a deduction for the taxable year that is equal to the amount of the credit determined for such taxable year under I.R.C. § 41(a).
IRC Section 280C(c)(3)(A)
Provides for an annual election for reduced research credit.
IRC Section 280C(c)(3)(C)
Provides that an election under this paragraph shall not be made any later than the time for filing the return for tax for the year the credit is claimed, including extensions.
IRC Section 280c reduced credit election can be extremely complicated – this is where Source Advisors can assist.
How Source Advisors Can Help with IRC 280c
Source Advisors can provide services related to your R&D tax credits and IRC 280c. Specifically, we can help with:
Determining if you should file your R&D tax credit with IRS code 280c election
Assisting your CPA or other tax return preparer with filing the necessary forms
Assisting with additional matters related to the forms
Need help with claiming the IRC 280c election?
Frequently Asked Questions
What is an R&D tax credit?
R&D tax credits, also known as the Research and Development credit, enable businesses to potentially reduce their federal income tax. Taxpayers might qualify for the credit if they paid for (or incurred) qualified research expenses. The expenses much have been for qualified research activities.
What qualifies for R&D tax credit?
As mentioned, to qualify for the research tax credits, a business must have paid for or incurred expenses related to qualified research activities. The qualified research activities under the US R&D tax credit can include the below. There are no size requirements or industry requirements. In fact, many businesses are surprised to find out their activities and expenses qualify for the R&D tax credit. Common industries that qualify include manufacturing, software, engineering, and financial services (plus many more).
- Creating improved products, processes, formulas, software, and techniques
- Automating or improving internal manufacturing processes
- Designing tools, jigs, fixtures, and molds
- Integrating new equipment
- Development of data centers, big data, and data mining tools
- Integration of APIs and other technologies
- Development of financial or pricing models
- Hiring outside consultants to perform any of the listed activities
- Manufacturing new or improved products
- Developing prototypes, first articles, models
- Evaluation of alternative materials
- Development of firmware
- Network hardware and software development and optimization
- Developing simulators
- Development of risk management systems
How does R&D tax credit work?
An R&D tax credit with the IRS provides businesses with a tax benefit when research and development business activities were conducted. In fact, many states provide R&D credits to help offset state tax liabilities. At Source Advisors, we can help determine the specific R&D tax credit rules within your state and guide you through the filing requirements. Documentation is often enough to suffice as proof of qualified expenses. This can include financial records, payroll records, and invoices.
If you need assistance with the IRS Research and Development Tax Credit, please contact us.