Passive Activity Credit for research and development

[chrisg5]

I have a sole proprietorship LLC and I spend money on research and development of a product asy year. Does anyone know how to claim it. I am on a form in turbot tax and it asks for "Form Activity to be Reported on", " Form Entered Credit on", " Current Year Credit Amount". Does anyone have experience with this?

Thank you in advance.

[DianeC958]

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

[chrisg5]

Thank you for the answer. To clarify, we received some investment money and i paid employees and also myself to work on research and development of a new product. I am assuming I can only take credit for the money I paid myself or do I get some credit for the money i spend on the employee?  There is not much income for our my business as it is startup. I am wondering what would be the best course of action for it.

[ThomasM125]

By investment money, do you mean someone took an ownership in the venture, or do you mean you borrowed money?

If someone paid you money and there wasn't an ownership interest involved and you don't need to pay it back, then it would be sales revenue that you need to report as business income. You can deduct the money your paid the other employees as research and development expenses, as mention earlier.

Since you are filing as a sole proprietor, the difference between the business income and expenses would be your taxable income, regardless of what you paid yourself.