Claiming the R&D Tax Credit for S-Corporations
The guidelines for claiming the R&D Tax Credit vary depending on certain factors; one being your organization type. It is beneficial to be aware of the general process for filing for your company structure. Below are the basics for S-Corporations filing an R&D tax credit claim.
- S-Corps file Form 2553 as an election of status.
- S-Corps file Form 1120S for their income tax return.
- S-Corps issue Schedule K-1’s to their shareholders.
When a S-Corp files an amended return, new K-1’s are issued to the shareholders. The K-1’s pass through income, losses, deductions and credits to the shareholders. The shareholders have the option of amending their personal returns with a form 1040X. The 1040X will reflect the gross credit, a tax on that credit, and it will trigger a payment to the shareholder for the net R&D credit.
In order for a shareholder to realize a benefit from an amended year, the S-Corp must have met its cut-off date for amending its 1120S and issuing K-1’s to the owners. Without the K-1’s from the S-Corp, the shareholders have no basis for amending their personal returns, regardless of their filing dates.
R&D credits are designated in Part III of the K-1. Ultimately, “flow through” incomes and credits hit the individual taxpayer’s personal return, Form 1040. The individual therefore benefits by his or her share of the R&D tax credit.
Is Amending a Return Worth It?
The R&D tax credit flow-through should be significant to justify amending a tax return. For example, a $1,000 benefit spread over 10 shareholders is only worth $100 each. Remember that amending returns authorizes the IRS to review the entire year.
S-Corps Filing Dates
- Initial filing date: 2 ½ months after the end of the fiscal year.
- Extended filing date: 6 months after the initial filing date.
- Fiscal year end = December 31
- Initial filing = December 31 + 2 ½ months = March 15
- Extended filing = March 15 + 6 months = September 15
S-corporations file amended returns up to 3 years after the date of filing. For example, if filed on March 15, 2012 then March 15, 2015 would be the last date to file an amended return.
S-Corps and Profitability
S-Corps do not have to profitable in the year in which they want to claim an R&D credit, but they must be actively engaged with carrying on a trade or business. They cannot be merely investing in someone else’s activity or acting as a conduit.