Printer Friendly

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 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 R&D expenses, provided that the credit is reduced by the product of the credit multiplied by the maximum tax rate. (Electing this "reduced R&D" credit for federal income tax purposes is usually motivated 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.

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, Chicago, Ill.
COPYRIGHT 1992 American Institute of CPA's
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1992, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

Article Details
Printer friendly Cite/link Email Feedback
Author:Ryan, Stephen T.
Publication:The Tax Adviser
Date:Feb 1, 1992
Previous Article:Must developers comply with Rev. Proc. 75-25?
Next Article:Reconsidering the election to segregate rental real estate undertakings.

Related Articles
Pending Canadian income tax issues.
Reconsider electing reduced R & D credit.
When to elect the reduced R & D credit (under sec. 280C).
Notice 95-14: check-the-box procedure for entity classification.
IRS to conform certain rules for 401(k) and 403(b) plans.
The mechanics of California's R&D tax credit.
Form 6765 and the R&D credit.
The final step in computing the R&E credit.
Check-the-box: not always the right answer for certain foreign corporations.

Terms of use | Copyright © 2016 Farlex, Inc. | Feedback | For webmasters