New Guidance from the IRS Makes Claiming R&D Credits More Complex

At a glance

• The main takeaway: Taxpayers wishing to claim research and development (R&D) credits for expenditures made in previous years are now required to provide very specific, detailed supporting documentation to retroactively claim those credits on amended tax returns.
• Impact on your business: While the new guidance aims to create more efficient tax administration, taxpayers who fail to follow the new filing procedures will likely have their refund claim for R&D credits from the prior year denied.
• Next steps: Aprio’s dedicated R&D Tax Credit Team are well-versed on the new amended return claim filing procedure and can guide you through the complex requirements.

Schedule a consultation with Aprio’s R&D Tax Credit Team today.

The full story:

In the fall of 2021, the Internal Revenue Service (IRS) issued a Chief Counsel Memorandum requiring stricter reporting and documentation for any taxpayer making an amended claim for a refund arising from an R&D tax credit. In order to comply with the new filing procedures, companies who are filling retroactive R&D claims for a refund on an amended return filed after January 10, 2022, will have to include extensive supporting disclosures on any qualified business activity that relates to the claim.

In the original announcement, the IRS provided a transition period of 30 days for a taxpayer to “perfect” a research credit claim for a refund arising from prior years. “Perfecting” a claim requires the taxpayer to provide any information or details not included in the original filing of the amended return. Taxpayers have a one-year transition period during which the taxpayers will now have 45 days to perfect the claim.

 For a R&D credit claim to be considered valid under the new IRS filing procedures, taxpayers are required to provide the following information at the time the credit is filed:

1. Identify all the business components for the R&D credit claim as it relates to that year.
2. For each business component, taxpayers need to identify all R&D activities performed, the name of the individual who performed the activity and the information sought to discover by each individual.
3. For that claim year, provide the total qualified employee wage expenses, total qualified supply expenses and the total qualified contract research expenses.

While the information outlined above is crucial for taxpayers to obtain for both original and amended R&D credit claims, this is the first time the IRS has required this information to be provided alongside Form 6765 with a tax return filing versus only requiring Form 6765 and requesting further detail only in the case of an R&D credit audit. Because this change in filing procedures was issued in a Chief Counsel Memorandum, which holds no statutory authority, practitioners are anxiously waiting to see if the IRS will issue regulations to provide taxpayers additional guidance on how to comply with the new filing procedures.

The bottom line

This new filing procedure will make claiming a refund for R&D credits more cumbersome and will require more experience in making sure these claims conform with the enhanced reporting requirements. Taxpayers should begin tracking and providing the appropriate supporting documentation to their CPA advisors as early as they can. Aprio’s dedicated R&D Tax Credit Team are continuously monitoring updates on the new R&D tax credit laws and can guide you through the new reporting standards.

Schedule a consultation with Aprio’s R&D Tax Credit Team today.

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