October 25, 2022

Qualifying expenditures can include design development or improvement of:

  • Products
  • Processes
  • Techniques
  • Formulae
  • And yes, even software

Amended returns are allowed.

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

New research and development tax credit requirements went into effect on January 10, 2022. These new rules require more detailed proof that credits are valid. So, many businesses seeking the credit now face extra work.

Below are some specific requirements to ensure sufficient information is filed with tax returns supporting the credit. Putting processes in place to record this information throughout the year helps 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 requested credit and also the business components related to the claim.

For each business component, which must meet numerous specific tests, the following questions must be answered:

  • What research activities were performed?
    • Reports should include a description of what activities were performed.
  • 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. Even so, you may want to include them in the initial filing.
  • 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 information, the IRS requires a business to provide annual totals for:

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

These expenses are reported on Form 6765 (Credit for Increasing Research Activities 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, they will request it by letter. Taxpayers have 45 days from being notified 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 10, 2024, the IRS will no longer allow a perfection period. This means claims must be complete and accurate when initially submitted. 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 may apply to your business, reach out to your Friedman + Huey team. This is complicated stuff.