How to use Turbotax for R&D Tax credits

The place to enter information for a single member LLC is the Federal Section, Wages & Income, Self-Employment.

As you answer the questions when it comes to expensing Research and Development you will need to create your own category.

Below is more information from IRS Publication 535.  If this is your first year and you want to expense your costs do not forget to make the election to deduct Research and Development costs as a current business expense.

Include a statement with your return that you are electing to deduct Research and Experimental Costs as expenses according to 26 U.S. Code § 174.Research and experimental expenditures

Research and Experimental Costs

The costs of research and experimentation are generally capital expenses. However, you can elect to deduct these costs as a current business expense. Your election to deduct these costs is binding for the year it is made and for all later years unless you get IRS approval to make a change.

If you meet certain requirements, you may elect to defer and amortize research and experimental costs. For information on electing to defer and amortize these costs, see Research and Experimental Costs in chapter 8.

Research and experimental costs defined.

Research and experimental costs are reasonable costs you incur in your trade or business for activities intended to provide information that would eliminate uncertainty about the development or improvement of a product. Uncertainty exists if the information available to you does not establish how to develop or improve a product or the appropriate design of a product. Whether costs qualify as research and experimental costs depends on the nature of the activity to which the costs relate rather than on the nature of the product or improvement being developed or the level of technological advancement.

The costs of obtaining a patent, including attorneys' fees paid or incurred in making and perfecting a patent application, are research and experimental costs. However, costs paid or incurred to obtain another's patent are not research and experimental costs.

From IRS Publication 535

Hi, Diane, many thanks for your response. Are there any significant benefits to take the election to deduct R&D costs as a current business expense.  I have three questions: (i) If you make this election, can you change your mind in the following year and "unelect" to deduct R&D costs as a current business expense?; (ii) If you did not apply for qualified R&D tax credits in past filings (previous years), can you apply for them later?; and (3) Can you use R&D tax credits to offset AMT? Thanks again!

To answer your questions:

(i) Yes, if you get IRS approval.

The costs of research and experimentation are generally capital expenses. However, you can elect to deduct these costs as a current business expense. Your election to deduct these costs is binding for the year it is made and for all later years unless you get IRS approval to make a change.

(ii) Each tax year is separate. You must include your expenses in the year your incur them.

(iii) You may be subject to AMT if you deduct certain research and experimental, intangible drilling, exploration, development, circulation, or business organizational costs. For more information on the AMT, see the Instructions for Form 6251, Alternative Minimum Tax—Individuals.

PUB 535

I have an S corp and prepare my company's 2019 tax return using Turbotax Business. I tried to claim the federal research credit using Form 6765. Does anyone know how to claim this credit using Turbotax Business?

If you are using a home office to do R&D and are incurring costs, but had no income for the year, can you still deduct the rent cost of the home office portion as an R&D cost?  Turbotax seems to imply that revenue is needed to qualify for deducting the home office portion of rent.  Is this true?

Home office deduction does not qualify for the R&D credit. However, if you have a business (reporting Schedule C), you may be able to deduct a Home Office Deduction against your business income. However, it does require net income in order to be counted. If it is not used in the current tax year, it can be carried forward (TurboTax does it for you as long as you use it next year) to the next year. 

Where can I find in step by step the R&D form to fill out.  We're C-Corp.   Thanks in advance. 

It's best to do it in the Forms Mode. Look for Form 6765 first. The information from that form will flow to Form 3800. So make sure that you check it for correctness as well. 

Remember to reduce your expenses on Form 1120 by the amount of credit you are receiving. 

Also remember to attach a statement to your return stating: "Qualified applicable research and development expenses were reduced by Research tax credit amount of $$$ calculated on Form 6765, Part B. The reduction appears on line XX of Form 1120."

Regarding the "remember to reduce your expenses on Form 1120 by the amount of credit you are receiving.".. If I'm a Sole Proprietor, do I do this on Schedule C?

Specifically do I simply reduce the Contract Labor amount (Schedule C Part II, line 11) by the Research Credit amount if I paid this contractor for the research? And attaching a statement stating as such?

Thank you

No, that is not the correct way. 

You should complete Form 6765, either Section A or Section B & C. 

Form 6765 is not supported by TurboTax, however, Form 3800 is. 

Form 6765 Section C reports the nonrefundable credit on Form 3800, Part III, line 1c. 

You can calculate your credit outside of TurboTax and then type Form 3800 in the search box in the top right and click on the Jump to link.  You will then be able to enter your credit in TurboTax Home and Business. 

You will need to print and mail your tax return attaching Form 6765 to the tax return.

Form 6765 Credit for Increasing Research Activities  

Instructions for Form 6765 Credit for Increasing Research Activities

I am no expert, instead a first time Turbo tax user who is a former tax preparer

The information below was provided by chat with technical support

I was told I could e file the federal return.

Then print only 3800 from Turbo tax

Print and fill out 6765 from the IRS website 

and stick the two forms in an envelope.

This is way easier than printing the whole 100 page return!

I asked more than once to confirm.

I haven't done it yet.

Wish me luck!

Hi, Kristina K:

Thanks for your answer posted on July 15, 2020.  I just saw it and would like to clarify a bit if you don't mind.  

1) If I report a Payroll Credit in 2021 on Form 6765 and flow to Form 3800, do I need to reduce my labor expenses on Form 1120 in 2021 for the same amount I'm claiming (not received yet)?  If yes, do I need to reduce the same amount of labor expenses on Sch. C as well (I'm filing 1040 LLC with Sch. C) ?   Why have to do at two places?  

2) On what line of Form 1120, shall I fill out the labor expenses that I plan to claim the credit on Form 6765?

3) I'm using Turbo Home Deluxe edition that doesn't support Form 1120 and 6765.  What am I going to do?  Print them all out and mail in?

Please advise and thank you so much!

Belle 

Form 1120 is the annual tax return for a C-Corp (no relation to an LLC filing on Schedule C) and this thread is for Research and Development activities specifically.

Can you clarify what payroll credits you are talking about taking so we can best help you out?

@changbel

HI, Ryansarn:

I'm in the same boat as you're.  Last year, I mailed a whole set of returns because I couldn't e-file Form 6765.  This year (2021), we are going to try your way (e-mail the core part and mail Form 6765 and 3800 plus 1120 if necessary).  I wonder, if your way worked last year?  Could IRS match your e-filled documents with your mailed in documents easily without any questions?  Please advise.  Thanks!

BC

Thank you for clarifying who needs to fill out the Form 1120.  So, in our LLC case filing Sch. C, we need to reduce the labor expenses in Sch. C if we claim R&D credits on Form 6765/3800.  Is it right?

The payroll credits we are going to claim is purely for R&D.  We are eligible for taking it.  

Thanks!

No, there does not appear to be any requirement to reduce labor expenses if you take the research credit.  While research credits and the payroll tax credit are included on Form 6765, they are different types of credits.  The research credit is generally allowed for expenses paid or incurred for qualified research. Qualified research means research for which expenses may be treated as section 174 expenses. This research must be undertaken for discovering information that is technological in nature, and its application must be intended for use in developing a new or improved business component of the taxpayer.

It is important to keep in mind what qualified research does not include.  In this regard, the research credit is not allowed for the following activities: 

• Research conducted after the beginning of commercial production.

• Research adapting an existing product or process to a particular customer’s need.

• Duplication of an existing product or process.

• Surveys or studies.

• Research relating to certain internal-use computer software.

• Research conducted outside the United States, Puerto Rico, or a U.S. possession.

• Research in the social sciences, arts, or humanities.

• Research funded by another person (or governmental entity)

The payroll tax credit election is an annual election made by a qualified small business specifying the amount of research credit, not to exceed $250,000, that may be used against the employer portion of social security liability. The credit is the smallest of the current year research credit, an elected amount not to exceed $250,000, or the general business credit carryforward for the tax year (before the application of the payroll tax credit election for the tax year).

The election must be made on or before the due date of the originally filed income tax return (including extensions). An election can’t be made for a tax year if an election was made for 5 or more preceding tax years. The election made by a partnership or S corporation is made at the entity level. Any election to take the payroll tax credit may be revoked only with the consent of the IRS. 

Here is a link to the IRS instructions for Form 6765 which you might find helpful.

Credit for Increasing Research Activities

@changbel

Hi, George: Re whether or not for a Sole Proprietor filing Sch. C needs to report the Payroll Tax Credit as an expense on Sch. C after claiming this credit on Form 6765, please refer to, in the thread Kristina K's example for corporation using Form 1120 to reduce corporate expenses after receiving the R&D credits. If we do, and the corporations need to, the R&D credits will defeat the purpose by losing its benefit. Isn't it? Thanks! changli

To follow-up on the comments from @KristinaK, you do have to reduce your expenses by the amount of the credit.  Without reducing expenses, a taxpayer would get the benefit of the R & D credit and also the expense deduction.  Accordingly, the IRS requires that Form 1120 reflect a reduction in expenses.  

@changbel

I am in the similar situation (Single Member LLC) and want to get a hang of this R&D credit.

- It seems you can't double "claim" the expenses. That is, if the expense is already used as business deduction, that expense CAN'T be used to claim for the R&D credit? Please confirm.

- If so, as a Single Member LLC (small business), all the qualified business expenses can be deducted, in my case. Unless by choice, I can't really think of any business expenses that can't be deducted and then used for the R&D credit. So this R&D credit may not worth the effort, no? Any thought?

Regards,

Joseph

- 

@easyxpress  You can't use payroll expenses that you use for the R & D credit as well as for another payroll credit.  But if you have payroll expenses that you can use for the R & D credit then it is a serious reduction in your tax liability - almost dollar for dollar.

I have a SMLLC operating at loss while performing R&D activities. It means that the 2021 R&D credit can only be applied in the future as a carry forward credit.  However, Form 3800 is deducting this credit from my 2021 taxes.  How to overcome this problem?

My little tip:

Form 3800 alone cannot automatically calculate the current year credit unless you have Form 6765 filled out first on Line 24 - 34 om Section B, and Line 36 and 38 in Section C (Current Year Credits).  The data on Line 38 must be transferred from 6765 to Form 3800, particularly on Line 34 in Part II, and column C of 4i, Line 35 and 36 in Part III.  Finally, on Form 3800, compare the number (the current year credit) on Line 36 with the Net Income on Line 37.   If Line 37 is 0, the Credit Allowed for the Current Year on Line 38 is 0.  

If you don't have Form 6765 filled out first and transfer the numbers to Form 3800, the final result on Form 3800 won't be accurate.  

Hope this tip helps!  

Thank your advice,

The problem is that after being provided with the numbers from Form 6765, TurboTax calculates the values of columns 7-38 automatically and never asks for the company's income.   TurboTax is aware about my company's negative income from Schedule C, but is not using it to limit the R&D credit or make it carry forward to 2022.

I also do not see any option in Form 3800 to carry forward this credit from 2021 to 2022. Only options that are present in Form 3800 are: carry forward to 2021 (I assume, from 2020) and carry back from 2022 (I assume, to 2021).

Hi,

Line 37 on form 3800 is to compare with your company's income (compare Line 29 Income to Line 36 R&D Credit).  If your income is negative, your Line 29 should be 0.  Then Line 37 should be 0.  Hence Line 38 (Credits Allowed for the Current Year) should be 0.  

Your question - Where to show you could carry forward the credits?  Turbo generates:

Additional information from your 2021 Federal Tax Return

Form 3800: General Business Credit -- Page 1 (Copy 1)
Line 4 Explanation Statement
Current Year General Business Credit Carryforward

You need to type in the total R&D Credits in this narrative box to let IRS know you have accumulated X number of credits to be carried forward to the future.  

Hope this helps!