Question

12-26 Tom, a calendar year taxpayer, informs you that duringthe year, he incurs expenditures of $40,000 that qualify for the incremental research activities credit. In addition, Tom's research base amount for the year is $32,800. Fill in the following:

A.

Qualified research expenditures for the year:
Less Base Amount:
Incremental research expenditures:
Tax Credit rate:
Incremental research activities credit:

B. Tom is in the 25% tax bracket. Determine which approach to the research expenditures and the research activities credit (other than capitalization and subsequent amortization) would provide the greater tax benefit.

Choice 1: reduce the deduction by 100% of the credit and claim the full credit. Fill in the table.

Qualified research expenditures reduced deduction:
Tax Rate:
Tax Benefit of reduced deduction:
Allowed credit:
Total tax benefit for choice 1:

Choice @: Claim the full deduction, and reduce the credit by the product of 100% of the credit times the max corp. rate. Fill in the table:

Deduction
Tax Rate
Tax Benefit of full deduction
Reduce credit at corp rate
Total tax benefit for choice 2

Answer 1

A)Amount of Incremental research activities credit :-

Particulars	Amount($)
Qualified research expenditures for the year	40000
Less : Base Amount	(32800)
Incremental Research Expenditures	7200
Tax Credit Rate	20%
Incremental research activities credits ($7200*20%)	1440

B) Choice 1:- Reduce the deduction by 100% of the credit and claim the full credit.

Particulars	Amount($)
Qualified research expenditures reduced deduction	38560
Tax Rate	25%
Tax Benefit of reduced deduction ($38560*25%)	9649
add : Allowed Credit	1440
Total Tax Benefit	11080

Choice 2 :-

Particulars	Amount($)
Deduction (Qualified Expenditures)	40000
Tax Rate	25%
Tax Benifit on full deduction ($40000*25%)	10000
Add: Reduced Credit ($1440 - (($1440*100%)*35%))	936
Total Tax Benefit	10936

Conclusion, Tax benefit of Choice 1 greater than Choice 2

Greater tax benefit = $11080 - $10936 = $144