Starting in 2018, federal corporate tax rates will be reduced from 35% to 21%. While the new lowered corporate tax rate would suggest that credits against tax, such as the R&D tax credit under Internal Revenue Code (IRC) Section 41, would be less valuable as corporations would likely have lower taxes to offset. While this certainly could be the result for some corporate taxpayers, the R&D tax credit actually increases as a result of these new statutory provisions.
The R&D Tax Credit may be computed under either the ‘regular’ method with a gross tax credit of 20% or the alternative simplified credit (ASC) method with a gross tax credit rate of 14%. The ASC method has become increasingly popular with taxpayers, given its relative simplicity.
When calculating the federal R&D tax credit, IRC Section 280C prevents taxpayers from receiving a double-benefit from both a tax credit and a tax deduction for the same research expenditures. IRC Section 280C(c)(3) provides taxpayers with a reduced credit election option in lieu of reducing their research expense deduction. The statutory mechanics for computing the reduced Federal R&D tax credit under the two available R&D tax credit methods is explained below.
Regular Calculation
To calculate the R&D tax credit under the regular calculation method, you take the eligible qualified research expenses (after adjusting for the base amount) and multiply this amount by the tax credit rate of 20% to get the gross credit amount. If electing the reduced credit under IRC Section 280C, you multiply the qualified research expenditures by 13% [20% - (20% x 35%)] with the pre-2018 highest corporate tax rate being 35%. Conversely, the highest corporate tax rate for 2018 is 21% with a tax credit rate of 15.8% [20% - (20% x 21%). Below is an example showing the effect on the credit because of the reduced corporate tax rate.
A taxpayer has $250,000 in eligible qualified research expenses. Under the old corporate tax rate, the company would have received a federal R&D Tax Credit of $32,500 ($250,000 x 13%). Under the new corporate tax rate, the same company would have received a $39,500 credit ($250,000 x 15.8%) or an additional savings of $7,000.
Alternative Simplified Credit (ASC) Calculation
For taxpayers that do not want to calculate their R&D tax credits under the regular calculation method, they can elect to use the ASC calculation method, however the 20% credit rate is reduced to 14%.
Therefore, the reduced credit rate under the old corporate tax rate would be 9.1% [14% - (14% x 35%)]. For the 2018 tax year, the reduced credit rate is now 11.1% [14% - (14% x 21%)]. Below is an example showing the difference when electing the ASC calculation method:
The taxpayer has $250,000 in eligible qualified research expenses. Under the old corporate tax rate, the company would have received a federal R&D Tax Credit of $22,750 ($250,000 x 9.1%). Under the new corporate tax rate, the same company would have received a $27,750 credit ($250,000 x 11.1%) or an additional savings of $5,000.
Under either calculation method, the taxpayer has received over 21% more R&D tax credits because of the reduction of the federal corporate tax rate, making claiming the credit more valuable and beneficial to corporate taxpayers in 2018 and beyond.
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