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Diagnostic Ref. 377 and Ref. 25420 You Must Manually Reduce Applicable Qualified Research Expenses

SOLVEDby IntuitLacerte Tax22Updated September 10, 2021

 Form 6765 for forms 1120 and 1120S is Generating a Critical Diagnostic:

You must manually reduce applicable qualified research expenses deducted by $XX of research credit from Form 6765, Section A. Attach a schedule to the tax return that lists the deduction amounts (or capitalized expense) that were reduced. Identify the line (or schedule or form) of the return on which the reductions were made. (ref. #377) Corporate module (ref. #358) S Corporate module

Per the 6765 form instructions:

If you do not elect the reduced credit, which can only be claimed on an original timely filed return (with extension),  you must reduce your otherwise allowable deductions for qualified research expenses or basic research expenses by the amount of the credit on line 17. If the credit exceeds the amount allowed as a deduction for the tax year, reduce the amount chargeable to capital account for the tax year for such expenses by the amount of the excess. Attach a schedule to your tax return that lists the deduction amounts (or capitalized expenses) that were reduced. Identify the lines of your return (schedule or forms for capitalized items) on which the reductions were made.

Follow these steps to elect to reduce credit per Section 280C in the Corporate module:

  1. Go to Screen 28.1, General Business Credits.
  2. Scroll down to the Increasing Research Credit (6765) section.
  3. Check the box "Electing reduced credit (Section 280C)," code 28.

Follow these steps to reduce the deductions manually in the Corporate module:

  1. Go to Screen 20, Deductions.
  2. Reduce the allowable Deductions manually by the amount of credit on the 6765 line 17.

Note: This will not clear the diagnostic.

Follow these steps to attach a schedule Identifying the deductions that were decreased in the Corporate Module:

  1. Go to Screen 42, Notes.
  2. Select print as, Statement in the top left corner.
  3. Enter the applicable information that lists the deduction amounts that were reduced. Also, identify the lines of your return (schedule or forms for capitalized items) on which the reductions were made.
  4. Select the Forms tab.
  5. Select Client Notes from the form list.
  6. Select Print Form, in the top right corner.
  7. Select Settings from the Print Form window.
  8. Uncheck Printer and check File (PDF).
  9. Select OK.
  10. Select OK, from the Print Form window.
  11. Save the PDF to a location you can find again, like your Desktop.
  12. Go to Screen 4.2, Electronic Filing.
  13. Select Attach PDF.
  14. Browse for saves document, Select OK.

Follow these steps to elect to reduce credit per Section 280C in the S Corporate module:

  1. Go to Screen 26.2, Credits (Schedule K).
  2. Scroll down to the Increasing Research Credit (6765) section.
  3. Check the box Electing reduced credit (Section 280C), code 23.

Follow these steps to reduce the deductions manually in the S Corporate module:

  1. Go to  Screen 15, Deductions.
  2. Reduce the allowable Deductions manually by the amount of credit on the 6765 line 17.

Note: This will not clear the diagnostic.

Follow these steps to attach a schedule Identifying the deductions that were decreased in the S Corporate Module:

  1. Go to Screen 39, Notes.
  2. Select print as, Statement in the top left corner.
  3. Enter the applicable information that lists the deduction amounts that were reduced.  Also, identify the lines of your return (schedule or forms for capitalized items) on which the reductions were made.
  4. Select the Forms tab.
  5. Select Client Notes from the form list.
  6. Select Print Form, in the top right corner.
  7. Select Settings from the Print Form window.
  8. Uncheck the box for Printer and check the box for File (PDF).
  9. Select OK.
  10. Select OK, from the Print Form window.
  11. Save the PDF to a location you can easily find, like your Desktop.
  12. Go to Screen 3.2 Electronic Filing.
  13. Select on Attach PDF.
  14. Browse for saves document, Select OK.

This critical diagnostic is more informational and will not prevent the return from being e-filed.

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