How the R&D Credit Works With Other Business Tax Credits

R&D and Other Business Tax Credits

The R&D Tax Credit under IRC §41 is one of the most valuable federal incentives for innovation-driven businesses. However, it often overlaps with other business tax credits such as the Work Opportunity Credit (WOTC), Energy Efficiency Credits, or the Orphan Drug Credit.
To maximize tax savings and avoid double benefits, taxpayers must understand how to coordinate the R&D credit with other federal and state incentives.

Relevant Tax Codes and Forms

• IRC §41(a): Establishes the R&D credit.
• IRC §38: Lists general business credits, including coordination rules.
• IRC §280C(c): Requires adjustments to prevent double deductions.
• Form 6765: Used to claim the R&D credit.
• Form 3800: Aggregates multiple general business credits.

Step 1: Understanding the General Business Credit (GBC)

The R&D credit is part of the General Business Credit (GBC) umbrella under IRC §38, which also includes:

• Work Opportunity Credit (Form 5884)
• Energy-Efficient Building Deduction (179D)
• Orphan Drug Credit (Form 8820)
• Empowerment Zone Employment Credit (Form 8844)
• Low-Income Housing and Rehabilitation Credits

All these credits are combined and limited by your tax liability cap, meaning your total business credits cannot exceed your federal tax due.

Step 2: Preventing Double Benefits (IRC §280C Adjustment)

If a taxpayer claims both a deduction and a credit for the same expense, the IRS requires a reduction to prevent double benefits under IRC §280C(c).

Example:
A company claims $100,000 in QREs and earns a $10,000 R&D credit.
To avoid double counting, it must either:

1. Reduce the deductible expense by $10,000, or
2. Elect the reduced credit on Form 6765, Part II, Line 17.

Most businesses elect the reduced credit option for simplicity.

Step 3: Interaction Between R&D and Other Credits

1. R&D and WOTC (Work Opportunity Tax Credit):

• Both can be claimed in the same year but not for the same wages.
• Example: If an employee’s wages are used for WOTC, they cannot also count toward QREs.

2. R&D and Section 179D (Energy Efficiency):

• These target different expenses.
• R&D applies to research and development; 179D applies to energy-efficient building design.

3. R&D and Orphan Drug Credit:

• Pharmaceutical firms can claim both but must segregate qualified testing expenses from R&D experimentation.

4. R&D and Employee Retention Credit (ERC):

• Wages used for ERC cannot be reused for R&D.
• Coordinate with payroll teams to avoid overlapping wage claims.

5. R&D and State Credits:

• Many states mirror IRC §41 and allow separate R&D credits, often stackable with federal ones.

Step 4: Calculating Combined Credits

Credits under the General Business Credit umbrella are added and claimed together using Form 3800.

Example:

If the taxpayer’s tax liability is $90,000, $15,000 is carried forward under IRC §39(a) (20-year carryforward, 1-year carryback).

Step 5: Best Practices for Coordination

1. Map out wage allocations — track which wages are applied to each credit.
2. Use separate cost centers for R&D, energy, and hiring credits.
3. Elect reduced R&D credit under IRC §280C to simplify deductions.
4. File Form 3800 to report and consolidate multiple credits.
5. Document support for each credit type — including time logs, invoices, and project summaries.

Conclusion

Coordinating the R&D Credit with other business tax credits ensures your company gets the maximum benefit while staying fully compliant with IRC §38 and §280C.
By strategically managing payroll, deductions, and documentation, you can optimize your total credit position without triggering IRS disallowances.

Call to Action

For professional guidance on coordinating R&D and Other Tax Credits, consult Anshul Goyal, CPA EA FCA, a U.S.-licensed Certified Public Accountant, Enrolled Agent authorized to practice before the IRS, and a cross-border tax expert assisting American and Indian businesses with R&D credit optimization and compliance.

Disclaimer

This content is for informational purposes only and does not constitute legal or tax advice. Always consult a licensed CPA before combining or allocating credits.

Top 5 FAQs

1. Can I claim R&D and WOTC together?
   Yes, but not on the same employee wages.
2. How do I report multiple credits?
   Use Form 3800 to aggregate and claim the General Business Credit.
3. What is the Section 280C adjustment?
   It prevents double benefits by reducing either the deduction or credit value.
4. Can I combine state and federal R&D credits?
   Yes, most states allow separate filings under their own credit programs.
5. How long can I carry forward unused credits?
   Up to 20 years under IRC §39(a).

About Our CPA

Anshul Goyal, CPA EA FCA is a Certified Public Accountant licensed in the United States, Enrolled Agent admitted to practice before the IRS, and a cross-border tax expert representing American and Indian businesses in R&D credits, audits, and IRS compliance.