The 280(c) election has long been a viable (yet highly underutilized) option for business owners claiming research and development tax credits. Under the standardized legislation, Section 41 requires that business owners leveraging R&D tax credits must add the credit to their income, thus increasing their tax by the amount of the credit times their marginal tax rate. The credit then reduces their tax, generating an overall benefit and tax reduction. However, when utilizing the 280(c) election, taxpayers don't have to route the credit back to their expenses, opting instead to take a reduced research tax credit at 65%. In short, rather than reducing the deduction, 280(c) allows companies to elect to reduce the credit rather than add it back to taxable income.
Under the provision guidelines, 280(c) effectively eliminates potential "double dipping," simultaneously preventing taxpayers from receiving both a credit and deduction on the same qualifying research and development expenses, yet still generally producing the same net benefit on a federal level. However, on a taxpayer level, opting for a reduced credit election leaves taxable state income unchanged, making it an attractive option for business owners operating in any tax bracket.
Tax Cuts and Jobs Act Can Change How You Claim Innovation Research Tax Credits
While business owners across multiple industries have used the 280(c) election when filing for innovation tax credits to optimize various benefits, financial professionals and executives are suddenly taking a heightened interest in this statutory provision due to the Tax Cuts and Jobs Act (TCJA). First passed into law by President Trump in December 2017, the TCJA is the most extensive tax reform bill passed in over three decades. The majority of the bill's provisions officially went into effect as of January 1, 2018, making all of its updated regulations viable options for both corporations and individual workers when filing this year's taxes.
The good news (for some) is that at least on some levels, the TCJA does reduce tax rates for both business owners and employees, although some may argue that the new bill benefits are decidedly corporation-centric. Case in point: The top tax rate for individuals will modestly dip from 39.6% down to 37%. However, under the new legislation, the highest business tax rate will drop from 35% all the way down to 21%. While this is excellent news for many entrepreneurs, those filing for research and development tax credits may find their lower tax rate status significantly devalues the impact of Section 41 on their bottom-line profits.
Enter the 280(c) election.
Operating under the new corporate tax rates, companies claiming research and development expenses with a 280(c) may find their credit surging from 65% all the way up to 81%, a sizeable increase that can quickly reduce overall tax obligation and drive invaluable cash flow. As a result, business owners and their financial planners in every R&D vertical should carefully analyze the new legislation to determine which filing option will deliver the biggest bang for their corporate buck when filing 2018 business returns. An analysis of each individual tax situation should be completed to determine whether a Section 280C(c) election will result in a higher overall tax reduction.
Don't Navigate the New Corporate Tax Legislation Alone
Overwhelmed trying to keep up with the latest R&D tax credit legislation? Acena Consulting can help. We are experts in the research and development vertical, helping our partners optimize returns and minimize corporate risk. Contact us today to hear more.