Category: Deductions & Credits; Corporations
Subject: S Corporation
Title: Research Credit
IRC Sections: 41(g), 53
Filename: 1352.html
Date Produced: 12/94

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Facts
Individual taxpayer (TP) is an 80% shareholder of an S corporation (S) which produced research credit. TP received both salary and S corporation income from S for the year in question. Section 41(g) limits the amount of research credit which can be utilized in a given tax year to a formula dependent on the tax attributable to the taxpayer's income allocable or apportionable to his interest in the pass-through entity from which the research credit flowed.

Issue
Can TP's salary from S be counted as part of the income attributable or apportionable to his interest in S for purposes of the computation under Section 41(g)? (Note that under an ostensibly similar limitation for purposes of Section 179, salary from the pass-through entity is counted.)

Answer
TP's salary from S can clearly be used as part of the income attributable or apportionable to his interest in S for purposes of the limitation set forth in IRC Section 41(g).

Discussion
The regulations under Section 41, specifically Reg. Sec. 1.41-9(c), provide that the limitation under Section 41(g) is to be applied in accordance with the regulations under Section 53 (the old jobs tax credit regulations). The authority for application of jobs tax credit principles to the limitation of R&D credit from pass-through entities comes directly from the committee reports under the Economic Recovery Tax Act of 1981 (ERTA) which initially enacted the research credit in the first instance. Regulation Section 1.41-9(c) refers the reader to Regulation Section 1.53-3. Example 1 of Regulation Section 1.53-3(d) explicitly deals with an S corporation shareholder who received salary from the S corporation as well as other flow-through income items. The example clearly includes the salary from the S corporation in the income attributable to the taxpayer's interest in the S corporation.

Given the clarity of Regulation Section 1.53-3(d), Example 1 and its clear applicability as established both by the regulations under Section 41 and the committee reports surrounding the enactment of the research credit, it seems clear that the taxpayer's salary from S should be counted for purposes of the Section 41(g) limitation.