Federal election for reduced R & D credit can be state tax planning opportunity.Taxpayers should consider making the federal election to take a reduced research and development (R&D) credit solely to reduce their state income tax liabilities. Under federal rules, a corporation allowed an R&D credit is required to reduce its expenses, and thus increase its income, by the amount of the credit (e.g., a $100 credit also increases taxable income Under the federal tax law, gross income reduced by adjustments and allowable deductions. It is the income against which tax rates are applied to compute an individual or entity's tax liability. The essence of taxable income is the accrual of some gain, profit, or benefit to a taxpayer. by $100). With the maximum corporate tax rate of 34%, the effective credit can be as much as $66. However, Sec. 280C(c)(3) allows an election to fully deduct de·duct v. de·duct·ed, de·duct·ing, de·ducts v.tr. 1. To take away (a quantity) from another; subtract. 2. To derive by deduction; deduce. v.intr. R&D expenses, provided that the credit is reduced by the product of the credit multiplied mul·ti·ply 1 v. mul·ti·plied, mul·ti·ply·ing, mul·ti·plies v.tr. 1. To increase the amount, number, or degree of. 2. Mathematics To perform multiplication on. by the maximum tax rate. (Electing this "reduced R&D" credit for federal income tax purposes is usually motivated mo·ti·vate tr.v. mo·ti·vat·ed, mo·ti·vat·ing, mo·ti·vates To provide with an incentive; move to action; impel. mo by alternative minimum tax concerns.) For many taxpayers, taking the "reduced R&D credit" can leave them with the same net federal tax result as the "full R&D credit." (Foreign tax credit implications also need to be considered.) For a taxpayer with a $100 R&D credit assuming no other federal tax implications), a reduced credit election would result in the same effective credit of $66 ($100 - ($100 x 0.34)). However, since most states do not provide for an addback of disallowed R&D expenses, there may be state tax benefits to electing the reduced credit. Additionally, the reduced credit election for federal purposes may not have any impact on a state's separate R&D credit provisions. Thus, the taxpayer may obtain a "full state R&D" credit while also receiving the benefit of the related R&D expense deduction deduction, in logic, form of inference such that the conclusion must be true if the premises are true. For example, if we know that all men have two legs and that John is a man, it is then logical to deduce that John has two legs. . Accordingly, a number of corporate taxpayers have elected the reduced R&D credit solely to achieve additional state tax benefits. From Stephen T. Ryan, CPA (Computer Press Association, Landing, NJ) An earlier membership organization founded in 1983 that promoted excellence in computer journalism. Its annual awards honored outstanding examples in print, broadcast and electronic media. The CPA disbanded in 2000. , Chicago, Ill. |
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