Section 41 R&D Credits for Pass-Through Entities After Tax Reform: Maximizing Tax Credits for Research Expenditures

Impact of Lower Corporate Rates on Value of R&D Credits, Special Allocations of Credits, Section 174 Expensing

Recording of a 110-minute CPE webinar with Q&A


Conducted on Thursday, March 28, 2019

Recorded event now available

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Program Materials

This webinar will provide tax advisers with a practical guide to maximizing the benefits of the Section 41 Research and Development (R&D) Income Tax Credit, with a focus on pass-through entities (PTEs). The panel will drill down into activities that constitute qualified research activities (QRAs), and detail how changes in the 2017 tax reform law enhanced the value of the credit for many taxpayers, particularly PTEs.

Description

The Section 41 R&D tax credit remains one of the most underutilized of all tax benefits available to small businesses. Calculation of QREs is often highly complex, and both partnerships and S Corporations face the additional challenges of allocating credits to shareholders. The 2017 tax reform leaves the credit mostly intact and contains features that potentially enhance the value of the R&D credit, particularly for pass-through entities (PTEs).

Section 41 allows a credit for a percentage of a QRE that a taxpayer incurs while engaging in research activities. The Code provides a four-part test to determine whether an activity can be considered a QRA. Expenditures, including wage expenses that have sufficient nexus to the QRA, can be included in calculating the expenditure base. However, substantiating that the activity qualifies as a QRA can be onerous, and tax advisers must know the standards and limits in utilizing this critical and overlooked credit.

The 2017 tax reform act created significant tax savings for pass-through entities to claim the R&D credit. The lowering of the top corporate tax rate directly impacts the value of a 280C election. Taxpayers claiming an R&D credit are required under Section 280C(c)(1) to reduce their allowable research expenses by the amount equal to their claimed Section 41(a) credit. However, the Code permits taxpayers to elect to reduce the claimed credit by the maximum corporate tax rate in lieu of this “add back.” The new Section 11(b)(1) top corporate rate of 21% effectively reduces the credit offset, allowing taxpayers electing under Section 280C(c)(3) to recognize 79% of the value of the 41(a) credit, instead of the previous maximum 65% benefit.

Additionally, the and the new centralized audit regime for partnerships provide opportunities in allocating tax credits to venture capital partnership investment. However, looming changes to Section 174(a) which will require amortization of experimental expenditures instead of current deduction treatment, create some urgency for companies to maximize the tax benefits of R&D expenses.

Listen as our experienced panel provides a thorough and practical review of calculating, claiming and substantiating a Section 41 R&D credit.

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Outline

  1. Overview of Section 41 R&D credit
  2. Four-part test to determine QRAs
  3. Documentation and substantiation of credit claim
  4. R&D credit considerations unique to pass-through entities
  5. Tax reform changes indirectly impacting the tax value of R&D credits for pass-throughs
    1. Lowering of corporate tax rate and impact on Section 280C(c)(3) election
    2. Section 199A and the R&D credit
    3. Implications of centralized audit regime changes on special allocations of R&D credits
  6. Pending changes to treatment of Section 174 expenditures

Benefits

The panel will discuss these and other relevant topics:

  • Determining whether an activity can be considered a QRA for purposes of claiming a Section 41 R&D credit
  • Documentation and substantiation requirements and practices from court cases
  • How the 2017 tax reform change to the top corporate income tax rate enhanced the value of the Section 41 R&D credit to PTEs
  • Impact of the centralized audit regime on strategies for special allocations of R&D credits

Faculty

Bryson, Les
Les Bryson

R&D Tax Credit Consultant
Endeavor Advisors

Over the last 12 years, Mr. Bryson has led the R&D department at a national tax advisory firm where he assisted...  |  Read More

Garcia, Angelique
Angelique Garcia

Manager
Warner Robinson

Ms. Garcia focuses her practice on managing and implementing R&D Tax Credit studies. Previously, at a consulting...  |  Read More

Mandarino, Joseph
Joseph C. Mandarino

Partner
Smith Gambrell & Russell

Mr. Mandarino's practice focuses on corporate, tax and finance law. He is involved with a wide variety of...  |  Read More

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