In this sixth installment in our series on R&D tax credits, we take a closer look at 280(c) elections and summarize the potential tax benefits for qualifying business owners.
Typically, when a company claims a tax credit they are required to add back the value of any expenses used to claim the credit. This results in an increase in taxable income and associated tax liability in the year the credit is claimed. The 280(c) election allows taxpayers to claim the after-tax value of the credit and does not require the add back of expenses.
Taxpayers make the 280(c) election on line 34 of IRS form 6765 (December 2020 revision) by checking YES or NO and completing the required percentage calculation. This election is made annually and cannot be changed on an amended return.
Why would a taxpayer make the 280(c) election?
As discussed previously, making the 280(c) election allows a taxpayer to claim the after-tax value of the credit without adding back the expenses used to claim the credit. This results in a lower tax liability than the taxpayer would have generated without the election. When you evaluate the remaining tax liability after applying the credit, there typically isn’t a significant difference with or without the election. The decrease in the value of the credit is offset by the decrease in the tax liability.
So, if there is no measurable difference for the taxpayer why would anyone make the election? From a practical perspective, making the 280(c) election simplifies the preparation of the tax return because an adjustment does not need to be made to remove the expenses claimed as part of the credit.
More importantly, the 280(c) election can provide savings on a taxpayer’s state income tax return. The states use the federal taxable income as a starting point for determining the state taxable income. By lowering the federal taxable income, a taxpayer can also lower their state taxable income.
Does the R&D tax credit 280(c) election affect my eligible expenses?
The protective 280(c) election will not impact the QRE you can claim. All it changes is the calculation of the credit used when filing your return. In many cases, business owners actually underestimate their qualifying research expenses. Here’s a quick recap of eligible items:
- Taxable wages paid to employees who directly contribute to qualified research activities
- Taxable wages paid to people who directly supervise such employees
- Taxable wages paid to people who directly assist such employees
- Payments to U.S. vendors who supply materials consumed in support of such work
- Payments to U.S. contractors who perform direct services in support of such work
The IRS considers all of these kinds of research expenditures legitimate, provided they serve a qualified research purpose that’s essential to your business, address a specific technological uncertainty, have a basis in hard science and follow a documented experimentation process.
Of course, all of this is contingent on your specific business circumstances and the nature of your research and development activity. The important thing for now is to be aware that a protective 280(c) election exists as part of the R&D tax credit rules. This is a question you’ll want to raise with your company’s tax preparer so that you know what your potential tax benefit will be with or without the election.
Interested in learning more about R&D tax credits?
Check out the rest of our R&D Roundup series:
- Your Guide to R&D Tax Credits
- What Expenses Qualify for R&D Tax Credits?
- How to Calculate R&D Tax Credits
- How to Claim R&D Tax Credits
- The R&D Tax Credit Four-Part Test
Contact Us
If you’re considering the R&D tax credit, or currently claim the credit but aren’t certain how IRS code changes might impact your tax return, we can help you evaluate your options, check for federal and possible state eligibility and prepare a personalized strategy to get the maximum benefit from the credit – possibly for multiple tax years. Contact us today to learn more.
