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Key Insight 

New legislation allows businesses to fully expense domestic R&D costs again, starting in 2025, reversing a major hurdle from the 2017 tax law. Now’s the time to revisit your R&D strategy. 

Research and Development (R&D) tax credits never went away, but for many businesses that had never considered conducting a study, the added complexity from Section 174 changes discouraged them from moving forward. With the recent passage of the OBBBA, that barrier is lifting, and 2025 once again offers the opportunity to expense domestic R&D costs. 

This shift makes now the perfect time to re-evaluate your position on R&D credits. Whether you’ve claimed the credit before or suspected your business might qualify, it’s time to restart the conversation. 

R&D Tax Credit + Section 174: What’s Changed? 

The R&D credit itself didn’t change, but the treatment of research expenses under Section 174 did. This has altered how businesses approached the credit in recent years. 

A Quick History 

Under the 2017 Tax Cuts and Jobs Act (TCJA), businesses could no longer immediately expense R&D costs. Instead, starting in 2022, those costs had to be: 

• Capitalized and amortized over 5 years for domestic R&D 

• Capitalized and amortized over 15 years for foreign R&D 

This funding mechanism was buried in the TCJA, and it hit many businesses hard. If you were running a loss on paper but had to capitalize millions in R&D expenses, you could suddenly find yourself with unexpected taxable income. 

The Barrier Has Been Lifted 

Thanks to the OBBBA, businesses can once again fully expense domestic R&D costs beginning with their 2025 return, removing a major hurdle created by prior Section 174 changes. 

Companies can also deduct any remaining unamortized R&D expenses from 2022–2024 in one of two ways: 

• 100% in 2025, or 

• 50% in 2025 and 50% in 2026. 

For small business taxpayers—those with average gross receipts of $31 million or less over the 2022–2024 period—there’s an additional planning opportunity: the potential to amend and deduct the remaining unamortized Section 174 asset.  

Eligibility is determined using the Section 448(c) three-year lookback test, which means your average annual gross receipts for those three years must fall under the $31 million threshold to qualify in 2025. 

We’re all waiting on more detailed IRS guidance to clarify the retroactive treatment, but the headline is clear: there’s a potential opportunity here. 

Who Should Be Thinking About This? 

This is a cross-industry conversation. Technology, biotech, and MedTech are obvious fits. But we’re also seeing successful credit claims from: 

• Dental practices 

• Medical equipment fabricators 

• Engineering firms 

• Manufacturers updating processes 

• Software developers and IT consultants 

If you’re innovating anything—products, processes, systems—and that innovation carries technical uncertainty and risk, you should have this conversation. 

And not just startups. Mature businesses in traditional industries often sit on unclaimed credits simply because they don’t realize their work is qualified. 

Frequently Asked Questions about R&D Tax Credits 

What qualifies as an R&D expense? 

R&D expenses include wages, contractor payments, supplies, and software costs associated with developing or improving a product or process. Crucially, the work must be technical in nature and involve experimentation or uncertainty. 

Is the R&D tax credit refundable? 

No, it’s not refundable, but it can offset income tax liability, and in some cases, payroll taxes, for qualifying small businesses. 

Can I go back and amend returns if I missed the credit? 

You can always go back and amend the returns to take the R&D credit if the statute has not passed (three years from date of filing). 

Are R&D tax credits just for startups? 

Not at all. While startups can benefit (especially with payroll tax offsets), established businesses often qualify for larger credits based on their scale. 

What You Should Do Now 

If Section 174 changes made you hesitant to pursue the R&D credit, that hesitation is no longer necessary. Don’t assume you don’t qualify. R&D credits apply more broadly than many think. We’ve helped clients uncover significant savings in industries they never expected. 

We’re waiting for final IRS guidance on handling 2022–2024, and our team is helping clients prep for various scenarios now. 

Walter Shuffain’s professionals are here to guide you through this evolving space. From determining eligibility to coordinating with R&D study specialists and mapping out next steps for retroactive filings, our team ensures you have clarity and remain compliant every step of the way. 

Reach out to your Walter Shuffain advisor today to restart the R&D conversation. 

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For Businesses: Incentives to Sustain and Grow

Several key provisions have been introduced to support business growth and adaptability:

Research and Experimentation Expenses:

Under current law, domestic research and experimental expenditures paid or incurred in tax years beginning after December 31, 2021, are required to be amortized over a five-year period. In tax years prior to 2021, these expenses could be immediately deducted in the year in which they were paid or incurred. Costs attributable to research or experiments outside the U.S. must be deducted over a 15-year period. The proposed law would delay to tax years beginning after December 31, 2025 the application of this rule with regard to research and experimental costs attributable to domestic activities. There would be no change for activities outside the U.S. The bill provides transitional rules applicable to interactions with research credits, as well as making accounting changes.

Bonus Depreciation:

The Act extends the 100% bonus depreciation for qualifying property placed in after December 31, 2022, and before January 1, 2026. This extension allows businesses to deduct the full cost of eligible property in the year of service, promoting investment in new assets. The provision retains 20-percent bonus depreciation for property placed in service after December 31, 2025, and before January 1, 2027.

Section 179 Deduction:

The deduction limit under Section 179 is increased for tax years starting after 2023, allowing businesses to expense up to $1.29 million and phase out thresholds starting at $3.22 million, indexed for inflation thereafter. Under current law, the maximum amount a taxpayer may expense is $1 million of the cost of qualifying property placed in service for the taxable year.

Business Interest Limitation:

For tax years starting after 2023 and before 2026, businesses can compute adjusted taxable income (ATI) for interest limitation with reinstated depreciation, amortization, and depletion deductions, enhancing cash flow.

Combating Fraud and Ensuring Compliance:

The Act introduces stringent measures to curb fraudulent claims, specifically targeting the misuse of the Employee Retention Tax Credit (ERTC). If signed into law, the proposed tax package would shorten the deadline to file all ERC claims to January 31, 2024.

For Families: A More Generous Child Tax Credit

The Child Tax Credit (CTC) sees a notable expansion for individuals. This credit calculates the refundable portion per child once the taxpayer’s earned income exceeds $2,500 by 15%. For tax years 2023 through 2025, the credit increases to $1,800, $1,900, and $2,000, respectively, offering substantial savings for families. Additionally, for the tax years 2024 and 2025, taxpayers can calculate their CTC based on the previous year’s earned income, providing flexibility in fluctuating income.

International Relations: U.S. and Taiwan

In a significant move, the bill extends tax treaty-like benefits to Taiwan to avoid double taxation, which may impact businesses with operations or interests in Taiwan.

Disaster Relief: Continued Assistance

Disaster relief provisions from the Taxpayer Certainty and Disaster Tax Relief Act of 2020 are extended. This includes benefits for those affected by federally declared disasters between January 1, 2020, and 60 days post-enactment of the new bill.

Simplifying Tax Reporting:

The reporting threshold for Form 1099-NEC and 1099-MISC increases from $600 to $1,000 for payments made after December 31, 2023, easing the administrative load for small businesses.

Promoting Affordable Housing:

The bill boosts the 9% low-income housing tax credit ceiling by 12.5% for calendar years 2023 through 2025 and reduces the bond financing threshold to 30% for projects financed by bonds issued before 2026.

Practical Implications:

This Act presents a mosaic of opportunities and considerations. Small business owners and professionals must promptly assess how these changes impact their operations and tax strategies. As the provisions have retroactive effects, it’s crucial to consult with tax professionals to maximize benefits and navigate the complexities of the new law.

The post Understanding the Tax Relief for American Families and Workers Act of 2024 appeared first on Walter Shuffain.

The R&D tax credit — generally 20% of qualified R&D spending over a base amount — was established to help U.S. businesses remain competitive in the global market by encouraging long-term investment in innovation within the U.S.  Companies across a variety of industries and of all sizes can benefit from the credit.  To qualify for the credit, research activities must satisfy specific criteria that can be complicated to navigate and challenging to document. If a business cannot utilize the credit in the current tax year, the credit can be carried back one year or carried forward for up to 20 years.

Proposed changes to Form 6765

The proposed changes to Form 6765 are intended to provide taxpayers with a consistent and predefined format for tax reporting and improve the information received by the IRS for tax administration and examination. In addition, the new reporting requirements should assist the IRS in facilitating its goals for increased transparency, closing loopholes, and processing accurate claims.

Insight

The additional reporting requirements resulting from the proposed changes to Form 6765 have sparked controversy due to the lack of guidance from the IRS on the level of detail and the type of information required to be provided as well as needed clarification of certain terms.

It also remains to be seen how this information will be analyzed and used by the IRS for purposes of auditing claims or selecting claims for examination. Until guidance is issued, taxpayers should be focused on implementing a diligent methodology and on the quality of the substantiation available to support the credit.

New Section F

Among the requirements for qualified research activities under Section 41 is a “business component” test. To meet this test, the application of the information discovered as a result of the research activity must be intended to be useful in the development of a new or improved business component of the taxpayer. For purposes of this test, a business component is defined as any product, process, computer software technique, formula, or invention to be held for sale, lease, or license or to be used by the taxpayer in its trade or business.

The IRS’s proposed changes to Form 6765 would require taxpayers to provide certain additional information by business component in new Section F, including the following:

• A description of the information sought to be discovered as well as the one or more alternatives evaluated in the process of experimentation;
• Whether the business component is new or improved;
• The type of business component (product, process, formula, etc.);
• The business component’s use (sale, license, used in the trade or business, etc.); and
• Qualifying wages by type (research, supervision, support).

The proposed new Section F also requests additional specific identifying information related to software business components.

Eligible taxpayers that follow the ASC 730 Directive would report their adjusted ASC 730 financial statement R&D qualified research expense amounts as a single business component. The ASC 730 Directive applies only to taxpayers with assets equal to or greater than $10 million who follow U.S. GAAP to prepare their certified audited financial statements. All other taxpayers would need to report the requested information separately for each identified business component.

New Section E

In addition to the reporting required under new Section F, the proposed Section E would require taxpayers answer five new questions, including the amount of officers’ wages included in qualified research expenses, whether the taxpayer acquired or disposed of a major portion of a trade or business during the taxable year, and whether the taxpayer has identified any new qualified research expenses.

Potential challenges for taxpayers

Although designed to assist taxpayers with meeting IRS requirements for properly documenting and filing accurate research credit claims, the proposed changes to Form 6765 pose several challenges for taxpayers.

• As currently drafted, Section F would require — for each business component — a description of the information sought to be discovered through the taxpayer’s research as well as the alternatives evaluated in the process of experimentation. Because the draft Form 6765 specifically instructs taxpayers to “use the space provided” for their answer, the IRS needs to give taxpayers additional guidance on the level of detail that must be provided in response to this question. We understand that the IRS is planning to address this issue, as well as whether taxpayers may use an alphanumeric naming convention for business components.
• Taxpayers claiming software as a business component would be required to select from various detailed categories of internal use, non-internal use, and dual function software to identify the qualifying software type. This requirement will likely require an additional level of technical review and will further require taxpayers to make current year determinations as to intended use of the software.
• Because intended use of the result of research may change over the life of an R&D investment, it is unknown what effect information provided in new Form 6765 will have on the ability of taxpayers to present new facts under examination to account for changes in the R&D life cycle that may not have been known at the time of the original filing.
• Section E would require a taxpayer to disclose the amount of officers’ wages seemingly in an effort to identify another high-risk area; however, taxpayers employ a wide array of legal and organizational structures that may lead to inconsistent reporting.
• Section E would also require taxpayers identify new qualified research expenses incurred during the taxable year. Further guidance is needed regarding what is considered a category of expenditures and how to determine whether a category is new – using a facts and circumstances analysis.

The IRS requested feedback on the proposed changes by October 31, 2023, including feedback on making Section F optional for certain businesses.  As currently drafted, exempted taxpayers would still be required to maintain books and records and provide Section F information in a similar format, if requested. Any exemption would not apply to amended returns for the research credit.

What taxpayers can do now: the importance of documentation for exam defense

The IRS examination process can be daunting, even for those familiar with it. A robust examination defense often involves tax professionals who can use their knowledge and experience to help present the taxpayer’s position accurately and persuasively.

Given the IRS’s scrutiny of R&D credit claims, it is essential that taxpayers maintain detailed records and other documentation to support their research credits on exam. Preparing robust documentation early in the R&D credit process is key to successfully supporting valid claims.

• Preparing for exam defense can clarify tax code complexities and align a taxpayer’s position with the tax code’s intent.
• A successful defense can prevent potentially significant financial penalties and additional tax liabilities.
• For many businesses, tax credits such as research credits or other incentives are central to their financial planning. Therefore, effectively defending these positions can be vital to maintaining strategic financial plans.
• How an entity handles and resolves an IRS examination can set precedent for future interactions with the IRS. A well-prepared defense can not only signal to the IRS the taxpayer’s commitment to compliance, it can also expedite the exam process as well as protect the company against potential reputational damage.

Written  by Laura Morris, Lisa Keith and Aaron Wright. Copyright © 2023 BDO USA, P.C. All rights reserved. www.bdo.com

The post The Section 41 R&D Tax Credit Reporting Requirements: Preparing for New Form 6765 appeared first on Walter Shuffain.

Notice 2023-63 was released only days before many taxpayers’ extended 2022 filing deadlines. Therefore, it is important to note that reliance on the pre-regulatory guidance contained in the Notice is voluntary. Notice 2023-63 announces, and requests comments concerning, the IRS’s intentions for future regulations. While the Notice allows for reliance, it does not carry any regulatory weight.

Among other important guidance, the Notice addresses seven key areas of uncertainty concerning the implementation of revised Section 174:

1.  Short taxable years
   Under the Notice, in a short taxable year, taxpayers prorate the amortization deduction based on the number of months in that short taxable year. This guidance essentially resolves the question of whether the five- or 15-year recovery period refers to calendar years (i.e., 60 or 180 months) or taxable years.
2. Identification of SRE expenditures generally
   The types of costs that constitute capitalizable SRE expenditures are highly fact specific. As a result, the IRS is unlikely to provide an exhaustive list of costs. The Notice does, however, provide clarity and examples concerning certain cost categories. Exhaustive coverage is beyond the scope of this summary, but notable inclusions as capitalizable SRE expenditures are all elements of compensation (other than severance), travel costs, as well as comprehensive overhead categories (rent, utilities, depreciation, security costs, insurance, taxes, maintenance, etc.). Two of the Notice’s more notable exclusions are the costs of service departments that only indirectly support SRE activities (for example, human resources or accounting) and interest on debt used to fund SRE activities.
3. Scope of software development
   The Notice provides clarity regarding the scope of software development subject to capitalization under Section 174. While the Notice’s guidance is detailed and nuanced, it centers mainly around two loose concepts. The first concept is that data or information bases are not software, nor is data entry software development. The second concept is that an item’s ready-for-sale date (or placed-in-service date for internal-use software) is a pivotal point: before that point the scope of capitalizable software development is reasonably comprehensive, capturing a wide range of activities. After that point, however, the scope is limited unless the activity involves material upgrades or enhancements to the software.
4. Research performed under contract
   The Notice also provides clarity regarding who, in a contract research scenario, incurs SRE expenditures — the research provider, the research recipient, or both. Again, the Notice’s guidance on this topic is detailed; however, the important takeaway is that a research provider is generally only subject to Section 174 if they carry financial risk associated with the project or can use or exploit the research product (the benefit of exploiting general know-how gained by performing the research is excepted).
5. Treatment of unamortized SRE expenditures in a year of disposition
   A key area of uncertainty within revised Section 174 involves what happens to unamortized SRE expenditures when a taxpayer undergoes a transaction resulting in a cessation of the taxpayer’s trade or business. The Notice provides some clarity with respect to corporate transactions (dividing treatment based on whether the transaction is or is not described in Section 381(a)).  With respect to partnerships, however, the Notice primarily signals the IRS’s concern for abuse and requests public comments concerning the appropriate application of Section 174(d) to various partnership transactions.
6. Long term contracts
   With respect to research associated with contracts subject to the percentage of completion method under Section 460, uncertainty has surrounded whether a taxpayer’s completion factor must include the gross amount of SRE costs a taxpayer incurs in a particular year, thereby accelerating contract revenue when Section 174 prohibits an offsetting deduction. The Notice provides relief on this issue, signaling that the IRS intends to also modify the Section 460 regulations to capture only a taxpayer’s amortization of SRE costs within the numerator of the completion factor, not the gross amount of the SRE expenditure.
7. Cost sharing arrangements
   The Notice states that the IRS intends to revise existing transfer pricing regulations under Section 482 to clarify the appropriate allocation of SRE costs between controlled participants in a cost sharing arrangement. 

The full implications of Notice 2023-63 will depend on each taxpayer’s unique facts and circumstances.

Written  by Lori Anne Johnston, Connie Cunningham and Javier Huertas. Copyright © 2023 BDO USA, P.C. All rights reserved. www.bdo.com

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• • A substantial increase in taxable income;
  • An expedited use of net operating losses (NOLs), necessitating a valuation allowance analysis for ASC 740 purposes; and/or
  • A strain on cash flow as a result of an increase in current tax liabilities.

Tax planning will depend on a taxpayer’s specific fact pattern and will be influenced by future IRS guidance, but under current rules, the foreign-derived intangible income (FDII) deduction could become an important tax planning opportunity to help mitigate the adverse impact of the new rules.

Section 174 and FDII Interplay

The new Section 174 rules were introduced under the Tax Cuts and Jobs Act of 2017 (TCJA) along with many other tax changes, including the creation of a new permanent tax benefit: the FDII deduction under Section 250. The impact on taxable income wrought by the capitalization and amortization of Section 174 costs brings certain tax provisions, such as FDII, back to the forefront.

Effective for tax years beginning after December 31, 2017, the FDII deduction creates a preferential tax rate for income derived by U.S. C corporations, or partnerships with C corporation partners, serving foreign markets. FDII is a new category of income and is broadly defined to include other sources of income beyond amounts directly derived from the exploitation of intangible assets. Revenues from the sale, lease, license, exchange or other disposition of general property and intangible property to foreign persons, including foreign related parties, as well as revenues from services provided to foreign persons, including foreign related parties, may qualify as FDII.

If applicable, the FDII deduction is a permanent tax benefit equal to 37.5%[1] times the net income from these qualified revenue streams,[2] resulting in an effective tax rate of 13.125%[3] on qualified income, compared to the federal statutory corporate rate of 21%. The computation of the FDII deduction is complex and requires the identification and analysis of potentially qualifying revenue streams and other relevant data, an understanding of the taxpayer’s organizational structure and any intercompany transactions, and the allocation and apportionment of expenses and other tax adjustments.

There is a taxable income limitation that applies when computing the FDII deduction. If a taxpayer’s combined FDII and GILTI amount exceeds taxable income after the application of any NOL deductions, the amount of the FDII and GILTI deduction needs to be reduced pro rata by the amount of the excess. Furthermore, taxpayers previously in an NOL position or able to fully offset taxable income with pre-TCJA NOL carryforwards were unable to claim the FDII deduction.

Fast forward to the 2022 tax year, and some taxpayers with historical losses are now becoming taxable as a result of the new Section 174 rules and looking for ways to offset the increase in taxable income. To the extent these taxpayers enter into foreign transactions, they should carefully evaluate their activities to determine whether they may avail themselves of the FDII deduction for all years in which they are taxable. Additionally, taxpayers that claimed the FDII deduction in the past should still be interested in reviewing their FDII approach with a fresh pair of eyes due to its interaction with Section 174 and the way in which expenses were historically allocated and apportioned, as well as other tax provisions.

Ultimately, taxpayers may see not only a reduction in their current federal income taxes payable, but also a substantial reduction in their effective tax rate due to an increase in the FDII benefit, specifically as a result of the change in Section 174 tax treatment. Careful consideration and a multidisciplinary approach to assessing the benefit are warranted. A few key considerations are noted below.

Proper evaluation and classification as U.S. or foreign Section 174 expenses: R&E expenditures incurred outside the U.S. by CFCs must be amortized over 15 years, increasing the GILTI inclusion and therefore tested income. An increase in GILTI would increase taxable income for the U.S. shareholder, but not deduction-eligible income for FDII purposes. As such, the increase in taxable income solely as a result of an increase in the GILTI inclusion would not result in a larger FDII benefit. Furthermore, if a U.S. taxpayer pays its CFC to conduct research and development (R&D) activities, assuming such costs are Section 174 costs to the U.S. taxpayer, such expenses will need to be amortized over 15 years. While this specific fact pattern would be unfavorable for such taxpayers from a Section 174 perspective, there would be a corresponding benefit, potentially in greater measure, from the FDII deduction.

Potential implementation or refresh of transfer pricing studies due to R&D arrangements: If a U.S. taxpayer performs R&D on behalf of its foreign affiliates, have they received payment for those services? If so, how much compensation is appropriate? Payments received from the foreign affiliate could yield foreign-derived deduction-eligible income and a FDII benefit. Taxpayers may also have the inverse arrangement, whereby a U.S. taxpayer hires a foreign affiliate to perform R&D activities on its behalf. In that scenario, the arrangement would need to be further reviewed to ensure such costs are appropriately deemed to be Section 174 costs of the U.S. taxpayer or its foreign subsidiary. There could be other nuanced funding or cost sharing arrangement considerations that should be analyzed for Section 174 purposes and ultimately may impact the FDII benefit.

Allocation and apportionment of Section 174 expenses: Specific rules govern the allocation and apportionment of Section 174 expenses under Treas. Reg. §1.861-17 for FDII, GILTI and foreign tax credit (FTC) purposes. Taxpayers that have historically forgone tracking Section 174 costs may have allocated and apportioned such expenses as an ordinary trade or business expense (e.g., salaries and wages). Because the methodology of allocating Section 174 costs could result, in certain instances, in significantly different outcomes from the allocation of other Section 162 expenses, the identification of Section 174 costs going forward will likely impact the FDII computation, as well as other provisions involving the allocation and apportionment of expenses under Section 861.

Written  by Sarah Chun, Stephen Napoli and Connie Cunningham. Copyright © 2023 BDO USA, LLP. All rights reserved. www.bdo.com

[1] For years beginning after December 31, 2025, the deduction rate is reduced from 37.5% to 21.875%.

[2] Subject to taxable income limitations.

[3] For years beginning after December 31, 2025, the FDII deduction results in an effective rate of 16.406% on qualified income.

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The world of tax law is constantly shifting, creating challenges and opportunities for businesses. One recent change that has generated considerable confusion and debate involves alterations to tax incentives for Research and Development (R&D) under Section 174 of the tax code. 

As a refresher, Section 41 provides tax credits for businesses engaged in R&D activities. These credits are typically calculated based on qualifying R&D expenses, such as qualifying wages, qualifying cost of supplies, and qualifying contract research activities. This section remains unchanged and provides significant tax benefits for innovation-centric businesses. 

However, the changes come into play with Section 174, courtesy of the 2017 Tax Cuts and Jobs Act (TCJA). Historically, Section 174 allowed businesses to deduct R&D expenses. This section is now in flux, with potential implications for various companies across diverse industries. 

Effective for the tax year 2022, following a five-year delay, expenses related to R&D are no longer immediately deductible. Instead, they must be capitalized and amortized over a five-year period using what is known as a half-year convention. For example, if a company incurs $1 million in R&D expenses in 2022, it can only deduct 10% in the first year, losing an immediate deduction of $900k. While the remainder is recovered over the next five years, this delayed deduction could significantly impact a company’s immediate cash flow and tax liability. 

Moreover, Section 174 also expands the scope of costs that must be capitalized and amortized, now including ancillary costs related to R&D activities. However, the definition of “ancillary” remains broad, and businesses eagerly await further guidance from the IRS. 

This modification significantly affects not just high-tech industries or pharmaceutical companies but a wide range of businesses. For instance, these changes can impact companies engaged in inventory processing or even orthodontists pioneering new treatments. 

So, what can businesses do? For now, R&D specialists and tax scholars are hopeful that Congress will modify or delay the implementation of Section 174 changes. The TCJA itself sunsets at the end of 2025, and there are ongoing bipartisan efforts to address the issue. However, the new rules are law until any new changes are enacted. 

In the interim, companies should not halt their R&D activities. Instead, they should prepare for these changes by appropriately classifying and tracking their expenditures. A business must follow certain rules even if it does not take the credit. 

We’ll update our information with the most recent changes as we navigate these changes. Stay tuned for updates and remember to consult with a tax professional about how these changes may affect your business. 

The post What businesses need to know about the recent Research and Development changes appeared first on Walter Shuffain.

While the new research and development tax credit requirements went into effect on January 10, 2022, which require more detailed proof that claims are valid, many businesses seeking the refund may face extra work when applying for the credit on their next tax return.

Knowing the credit’s specificity requirements will allow businesses to ensure sufficient information is collected and filed with amended tax returns to provide proof for the claim. Putting processes in place to record these requirements throughout the year can help lessen the paperwork burden around tax time.

What Must be Submitted With the Claim?

Any business submitting an R&D tax credit claim must include detailed information about the funds for which they are requesting the credit and the business components related to the claim for the associated tax year.

For each business component, answer the following questions in detail:

• • What research activities were performed?
    • Each business component/research activity must meet the four-part test described in Sec. 41(d)(1) on its own.
    • Reports should include a description of what activities were performed and how but do not need to detail the four-part test.
  • Who performed each research activity?
    • The report may include title and position or name. The IRS has stated it may ask for specific names upon review of the claim.
  • What information did each individual seek to discover for that component?

The IRS has granted flexibility in how the information is presented, so businesses can use a list, table, or narrative.

In addition to the above questions, the IRS requires a business to provide tax-year totals for:

• • Qualified employee wage expenses,
  • Qualified supply expenses, and
  • Qualified contract research expenses.

These expenses are outlined on Form 6765 (Credit for Increasing Research Activities) and must be completed appropriately to qualify for the credit.

The final piece of information the IRS requires is a signed declaration verifying that all facts provided in the report and on the tax forms are accurate.

What Happens if There’s Missing Information?

If the IRS finds information is missing or requires additional clarification, it will request what is needed by letter. Businesses and taxpayers have 45 days from being notified, instead of the traditional 30 days, to remedy the situation.

If the business misses the window or does not provide sufficient information at that point, the IRS can deny the R&D tax credit claim.

After January 9, 2023, the IRS will no longer allow a perfection period. This mean means claims must be complete and accurate when submitted; otherwise, they are considered untimely if corrected after the deadline. The IRS advises that “taxpayers should take extra precaution to substantiate their credit for a refund claim.”

For assistance with the new research and development tax credit requirements as they apply to your business, reach out to our team to set up a time for a consultation.

The post Do You Know How to Navigate the New IRS Requirements for R&D Tax Credit Claims? appeared first on Walter Shuffain.

Do I qualify for the payroll tax credit?

Businesses with qualifying research activities and expenditures with less than $5 million in gross receipts for the taxable year and have no gross receipts or interest income dating back more than five years can utilize the payroll tax offset.  For example, a taxpayer making this election for 2020 must not have had any gross receipts in a tax year preceding 2016.

What is the benefit of the payroll tax credit?

The maximum benefit a qualifying business can claim against their payroll taxes each year is $250,000, with a maximum of $1.25 million over five years.

What are qualifying R&D activities?

A company’s activities must pass what is known as the four-part test to be eligible for R&D credits:

• Elimination of uncertainty – a demonstration that an attempt has been made to eliminate uncertainty in the development or improvement of your product or process.
• Process of experimentation –  activities such as modeling, simulation, systematic trial, and error demonstrate a process to address uncertainty in your product development.
• Technological in nature – This experimentation process must rely on hard science, such as engineering, physics, biology, chemistry, or computer science.
• Qualified purpose – Research must be for the purpose of creating a new or improved product or process that results in increased performance, function, reliability, or quality.

What costs are eligible under R&D?

Eligible R&D costs include wages, supplies, contract research, and rental or lease of computers. Taxable wages would apply to employees who provide direct supervision of the research. Supplies used in the research would include extraordinary utilities but not administrative supplies. Contract research would apply to any subcontractor expenses, including labor, services, and research. Lastly, payments were made for computers and server space for hosting software under development.

When do I claim the payroll tax credit?

You can begin to benefit from the payroll tax credit in the first calendar quarter after filing your income tax return.

For example, companies need to file their federal income tax returns by March 30 to apply the payroll tax credit to the second quarter. As a result, the earliest taxpayers are likely to see a benefit in July, when they file their quarterly payroll tax returns for the second quarter (Form 941).  If you extend your income tax return, you’ll be able to take advantage of the credit in the quarter after you file your federal return: file the return by June 30; take credit on the October 31, Form 941 filing; file return by September 30; and take credit on January 31, Form 941 filing.

To better understand the R&D tax benefits, work with your accountant to research approved activities and expenditures your business may incur through research.

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