Decoding IRC 280C(c): Should You Opt for the Reduced Credit Election on R&D Tax Credits?

Recently, a CPA reached out to me after reading several articles about the R&D tax credit under IRC 41. He noted that taxpayers who take this credit do not need to apply the “add-back” rule if the credit is less than the amount taken as a deduction in that year, due to the requirements of Section 174 amortization. Internal Revenue Code Section 174, which as of 2022 requires taxpayers to amortize certain research and experimentation expenditures over a period of 5 years. Read more about the hope for a 174 fix here.

Indeed, IRC 280C(c) specifies that the “add-back” rule only applies when the credit exceeds the amounts “allowable as a deduction for such taxable year for qualified research expenses or basic research expenses”. This means that taxpayers can either follow this rule or opt for the Reduced Credit Election (RCE).

The Reduced Credit Election (RCE)

The RCE allows taxpayers to tax the credit at 21%. However, if a retroactive fix is implemented and the original 280C RCE was not elected, taxpayers cannot amend their returns to make this election. Given that many of our clients have a typical tax rate of 35% or higher, the temporary benefit of not taking the RCE could later cost them 14% or more.

Making Informed Decisions

It’s crucial for us to ensure our clients are fully aware of their options. The decision to take the R&D tax credit under IRC 41 or opt for the RCE should be made with a thorough understanding of the potential long-term implications. By doing so, we can help our clients make informed decisions that align with their financial goals and tax strategies.

26 U.S. Code § 280C - Certain expenses for which credits are allowable | U.S. Code | US Law | LII / Legal Information Institute (cornell.edu) : Ibid. : Ibid.

About Brady

Brady is the founder and CEO of BRAYN Consulting LLC, a consulting firm in the US with over 50 employees. Additionally, he is the founder and CEO of HPCE SAS, an Ecuador-based company providing nearshoring talent solutions to North American businesses. He is also the author of the book "The Millionaires You Went To High School With: Uncommon Wealth from Common People." https://a.co/d/1B9c6lW

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