Raising the Stakes for R&D Tax Credit Refunds

At a glance

• The main takeaway: The transition year provided with the new filing procedures for R&D credit refunds is more than halfway through, so businesses considering amending to claim a refund should act soon to take advantage of the ability to potentially perfect denied claims.
• Weighing costs and benefits: The additional time and costs associated with compiling and filing the required documentation, combined with the heightened IRS scrutiny on eligibility, means businesses should carefully evaluate whether it’s advantageous to pursue an R&D credit refund.
• Next steps: Schedule a consultation with Aprio’s R&D Tax Credit advisors to assess your business’s opportunities and evaluate the potential risks and benefits of amending.

The full story:

When new filing procedures and documentation requirements for R&D Tax Credit refunds went into effect on January 10, 2022, so did a one-year transition period providing an opportunity for companies to “perfect” denied or deficient claims. That transition period is set to end on January 10, 2023, at which point any amended claims the IRS denies will be immediately rejected with no opportunity for appeal.

With more than half of the transition year now behind us, the impending end of that period is the next step in making it more challenging for companies to receive a refund. If your company has been considering amending prior year returns to claim an R&D refund, doing so before the transition period ends will provide a critical safety net to improve your chances of receiving your credits. However, satisfying the new reporting and documentation requirements is no easy feat.

Under the new requirements, taxpayers claiming R&D credit refunds must prove eligibility

Taxpayers filing retroactive R&D claims for a refund on an amended return must submit supporting documentation that proves the business’s eligibility with their tax return. Per IRS guidance, this supporting documentation must compile “five items of information,” including:

1. All business components included in the R&D claim;
2. All research activities performed for each business component;
3. A listing of the individuals or job titles that performed the research activities;
4. The information each individual or job title sought to discover; and
5. The total qualified expenses, including employee wages, supplies, and contract research.

In requiring this information, the IRS is asking taxpayers to demonstrate the nexus between the research activities performed, the individuals performing those activities, and the associated costs. For this nexus to pass IRS scrutiny, businesses will need to present thoroughly and purposefully compiled documentation, which would be challenging to do successfully without the help of a tax advisor specializing in R&D Tax Credits.

Not all businesses that can claim an R&D credit refund should, regardless of eligibility

Businesses familiar with claiming the R&D credit know that the information outlined above is necessary for calculating the R&D credit at any point – not only when amending; however, the requirement for the timely submission of this information and the new risk for credit denial significantly raises the stakes for companies attempting to claim R&D credit refunds. The new procedures mean the IRS will evaluate claims with significantly heightened scrutiny, and the additional effort to prepare the required documentation will make calculating the credit more laborious and, thus, more expensive. This could make claiming the credit prohibitive for companies where the potential size of the refund does not outweigh the additional cost, effort, and risk, so taxpayers should proceed with caution.

The bottom line

If you’re unsure whether the risks outweigh the benefits for your business to claim an R&D credit refund, or if you’re unsure of your business’s eligibility for the credit, Aprio can help. Schedule a free consultation, where a member of Aprio’s experienced R&D tax credit team will assess your business’s unique situation and help you determine the most advantageous next steps.

Related resources

• Breaking: IRS Introduces New Rules for R&D Tax Credit Refunds
• It’s Official: Software Development Included in Tax Definition of R&D
• IRS Sets Forth Required Information for a Valid Research Credit Claim for Refund