by Nathan Buchalski and Ginger Powell
Plante & Moran, PLLC is an IMA Member
Taxpayers claiming a research credit in 2018 will now benefit from the lower corporate tax rates under the Tax Cuts & Jobs Act (TCJA). The maximum corporate tax rate reduction increases the research credit’s net benefit to 79 percent—compared to 65 percent in prior years.
In general, federal tax law (Section 280C) requires taxpayers to reduce business deductions by the amount of any research credit claimed, preventing a double benefit that would result by taking a deduction and a credit on the same expenses. However, Section 280C(c) allows a taxpayer to elect a reduced research credit in lieu of reducing such deductions. This reduced credit is calculated using the maximum corporate tax rate, which has dropped to 21 percent under the TCJA, from 35 percent in recent years. This results in a new research credit net benefit of 79 percent (100 percent less the 21 percent, the new maximum corporate rate), compared to 65 percent in prior years (100 percent less the 35 percent prior corporate rate).
For example, consider a company that claimed a $100,000 research credit in 2017. By electing the reduced research credit, the dollar for dollar reduction in tax was $65,000, based on 2017’s 35 percent maximum corporate tax rate. However, as of 2018’s Section 280C(c) reduced research credit, that same $100,000 is now worth $79,000 based on the new 21 percent maximum corporate tax rate. This results in more money available to companies to reinvest back in the business in innovation and development.
Electing the reduced research credit will benefit many companies. However, companies with tax-year losses or who elect the research credit payroll tax offset will need to consider other factors.
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