Question

Fedora, a calendar year taxpayer, informs you that during the year she incurs expenditures of $61,000 that qualify for the incremental research activities credit. In addition, Fedora’s research-credit base amount for the year is $50,200.

a. Enter Fedora's incremental research activities credit for the year: $.

b. Fedora is in the 24% 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 to Fedora.

If required, round your computations to the nearest dollar. Use rounded amounts in subsequent calculations.

Total tax benefit of Choice 1 - Reduce the deduction by 100% of the credit and claim the full credit:
$
Total tax benefit of Choice 2 - Claim the full deduction, and reduce the credit by the product of 100% of the credit times 21%:
$
Therefore, Fedora should select Choice 2

Answer 1

A)

Particular	amount
Qualified research expenditure for the year	$61000
Less: base amount	($50200)
Incremental research expenditure	$10800
Tax credit rate	20%
incremental research activities credit(10800×20%)	$2160

B)

Choice 1)

Particular	Amount
Qualified research expenditures reduced deduction(61000-2160)	$58840
Tax rate	24%
Tax Benefit of reduced deduction ($58840*24%)	$14122
Add: allowed credit	$2160
Total tax benefit	$16282

Choice-2)

Particular	amount
Deduction (Qualified Expenditures)	$61000
Tax rate	24%
Tax Benefit on full deduction ($61000*24%)	$14640
Add: Reduced Credit ($2160 - (($2160*100%)*21%))	$1706
total tax benefit	$16346

Conclusion:

As the tax benefit of choice 2 is greater therefore, Fedora should select choice 2