Do You Know How to Navigate the New IRS Requirements for R&D Tax Credit Claims?

Written by: Jonathan Yorks, CPA

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.