How to use Turbotax for R&D Tax credits

[changbel]

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!

[GeorgeM777]

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

[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

[GeorgeM777]

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

[easyxpress]

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

- 

[RobertB4444]

@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.

[AlexCA]

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?

[changbel]

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!  

[AlexCA]

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).

[changbel]

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!

[changbel]

Suggest Intuit add Form 6765 to Turbo Deluxe, so that we can e-file both Federal and State. 

Otherwise, it is such a big hassle to mail both of these returns just because of this form not supported by Turbo.  Thank you!

[davidgwenadler]

Did you ever attempt this, and if so did it work out?  I'm in the same situation where I have a R&D credit claimed via form 6765/3800 and TurboTax doesnt let me e-file my return because of it.  Can I simply send the form 3800 and form 6765 in by mail and e-file the rest of the return?

thanks

"

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."