United States

Interplay between reduced research credit election and DPAD

TAX BLOG  | 

If your business is engaged in research and experimentation (R&E) activities, you can generally deduct related expenses. You may also qualify for the research credit for certain expenses incurred in performing qualified research.

The rules governing the interaction between the deduction and the credit provide that a taxpayer must reduce its R&E expense deduction by its research credit amount. However, you may elect to take a reduced research credit in lieu of this R&E expense add-back.

If a reduced credit election is made, you no longer need to reduce the research deduction claimed and instead claim a research credit that is reduced by the maximum 35 percent corporate tax rate. Corporations subject to the top corporate rates would be subject to the same tax liability with or without the election.

If your business is seeking to lower taxable income because of state tax or alternative minimum tax, you may realize a benefit from electing the reduced credit. However, if you are taking a domestic production activities deduction (DPAD), you may prefer not to elect the reduced research credit. In the situation where a taxpayer's DPAD is limited to 9 percent of taxable income, electing the reduced research credit would also reduce the DPAD.

Work with your tax advisor to analyze all possible outcomes before electing the reduced research credit.


Tom Windram

Partner

Tom leads the technical research and analysis for RSM’s federal credits and incentives team nationally. Reach him at tom.windram@rsmus.com.

Areas of focus: Federal Credits & IncentivesWashington National Tax