With the final income tax extension deadline upcoming quickly, this article touches on some quirks involved with filing a second income tax return within the timely filing period, including extensions, also known as a superseding return. We will discuss:
- The differences between superseding and amended returns,
- Claiming the Credit for Increasing Research Activities (better known as the R&D tax credit) via superseding returns,
- Making the Qualified Small Business Payroll Tax Election and Reduced Credit Election via superseding returns, and
- How claiming the R&D tax credit on a superseding return can bypass having an impact on taxpayer K-1’s and previously filed Form 1040’s.
Amended vs. Superseding Returns
Companies and individuals file amended returns to correct mistakes discovered on the original return, to include new information that was not known at the time of the original filing, or both. They are filed after the original return due date, including extensions, and exist separately from the original return. For example, we regularly see CPAs filing amended returns to claim R&D tax credits for companies that were unaware they qualified or that previously underclaimed the available benefit.
While often filed for the same reasons as an amended return, a superseding return is different in two key respects: it is filed before the original tax return due date, including extensions, and it replaces the originally filed return. Only one return exists after filing a superseding return, while two returns exist after amending an original return. CPAs will often prefer a superseding return to an amended return because they are less costly to file and can more easily meet compliance rules. The IRS highlights differences between superseding and amended returns on its website.
R&D Tax Credits, the PATH Act, and Payroll Tax Offsets
Companies commonly approach their CPAs to claim the R & D tax credit once they have learned about the benefit from outside experts, but only after the tax return has been filed. When this occurs, CPAs may find themselves in a situation where they need to file superseding returns before the extended deadline to claim the R&D tax credit. Consequently, this can create additional filing requirements for shareholders of such businesses who have already filed their corresponding 1040 returns for the year. Depending on the shareholder’s ownership percentage and the magnitude of the refunds generated by claiming the credit, some may not want to incur the additional time and cost to refile their individual returns to claim the refunds.
Congress enacted the Protecting Americans From Tax Hikes Act of 2015 (PATH Act), P.L. 114-113, in part to help Qualified Small Businesses (QSBs) take advantage of R&D tax credits without needing to be taxable. QSBs are businesses with:
- Gross receipts for the tax year of less than $5 million and
- No gross receipts for any tax year preceding the five-tax-year period ending with the credit year.
Prior to the PATH Act, businesses could only utilize their R&D credits to offset income tax and would be forced to carry the credit forward until they had income to offset. Under the PATH Act, however, QSBs can elect to claim all or part of their R&D tax credits to offset the employer portion of Social Security taxes due on quarterly Form 941. The election is available to C corporations, partnerships, LLCs, and S corporations as an entity-level election and must be claimed on a timely filed tax return, including extensions. Superseding returns are considered timely filed returns, so taxpayers who failed to claim R&D tax credits the first time, or who claimed as income tax offsets instead, can file a superseding return and still meet the QSB statutory requirements. Because taxpayers claim the payroll tax offset at the entity level, K-1 holders may not have to refile individual returns in certain scenarios while still seeing benefits to the company. Let’s discuss how.
The R&D tax credit is calculated and claimed via Form 6765 and attached to business tax returns. The form allows taxpayers to elect the § 280C reduced credit, which reduces the amount of the credit claimed by the maximum corporate tax rate. The 280C election, like the QSB election, can only be made on an originally filed (including extensions) or superseding return. This election negates the requirement to reduce the business’ otherwise allowable deduction for qualifying expenses by the amount of the credit claimed. In effect, § 280C prevents taxpayers from receiving a double benefit due to a deduction and a credit for the same expense. The business’ taxable income does not change when the 280C reduced credit is elected because there is no expense reduction.
You may be wondering, but what about the credit itself? Doesn’t that still show up on my K-1 and cause me to have to amend my personal return? Yes, unless you elect 100% of the credit generated as a payroll tax offset in section D and elect the 280C reduced credit. If you are a QSB and elect all of your R&D credit to offset payroll taxes, then no amount of the credit shows up on your K-1, and you are thus not required to file a superseding individual income tax return.
Some companies may prefer not to elect the 280C reduced credit so that they can use the entire gross credit to offset payroll taxes, despite the increased filing costs of the taxpayer’s superseding Form 1040. This may happen when a company is in NOLs and does not anticipate being out of NOLs for the foreseeable future. In that scenario, a company may prefer to reduce their NOLs and see more of the benefit now given that the deductions would not be used for some time. That company will lose the NOL benefit once profitable, but the time value of money likely dictates that having the payroll tax credit earlier is more beneficial.
Regardless of which decision you make, the experts at BRAYN and your CPA can guide you to the greatest value. Contact us today for a free assessment: firstname.lastname@example.org.