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R&D Tax Planning for the Mid-Market Client

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Larger corporations often have research and development departments, along with tax personnel and consultants focused on maximizing the R&D tax benefit. Small to midsized businesses have other indicia their tax pros should look into.

Dec 21st 2021
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What would cause a tax professional to need to review R&D tax benefits for midsized or smaller clients?

The main tax savings can arise from the federal benefit, but many states also have benefits. The usual focus is the R&D tax credit – officially “research and experimental credit” - which isn’t just for big companies.    

Authorities at Hand

Following is a brief roadmap of the primary authorities on our topic:

  • Sections 38, 41, 174, 280C
  • Regs. 1.41-0 Table of contents of regulations 1.41-1 to 1.41-9
  • Regs. 1.174-1: R&D basics
  • Regs. 1.174-2: R&D defined
  • Regs. 1.174-3: R&D treated as an expense
  • Regs. 1.174-4: R&D treated as deferred expense
  • Regs. 1.280C-4: Credit for increasing research activities
  • Form 6251 Alternative minimum tax – individuals (Part 1, line r)
  • Form 6765 Credit for increasing research activities (instructions include overview of qualifying expenses)
  • Notice 2017-23:  Election by qualified small business to claim payroll tax credit for increasing research activities

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Overview

Under Regs. 1.174-1, research and development may relate to a general program or particular project.  Expenditures are deducted up front, amortized or capitalized.

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