The R&D tax credit was implemented in 1981 as a means to encourage businesses to increase innovation investments. However, the IRS recently announced new R&D tax credit guidelines that could have major implications for businesses hoping to claim this valuable credit. The new research and development tax credit guidelines came out on October 15, 2021. The release included new instructions for claiming the credit and additional compliance requirements. Keep reading because we’ll cover it all in this special report.
This article covers the recent reporting updates. Check out our main page on the R&D tax credit here if you’d like to learn more about the credit.
What is the R&D Tax Credit?
The R&D tax credit reimburses businesses for a portion of their R&D investments. In 2015, the IRS gave the R&D received permanent status under the PATH Act. This act also broadened the credit’s application and gave small businesses and start-ups the chance to earn big savings. R&D is a huge expense for many businesses, and the government hoped the tax credit would foster greater innovation. Businesses can reap dollar-for-dollar tax savings and apply them to R&D expenses within the US, like qualified employee wages, equipment costs, and more.
Small businesses and start-ups can reap significant benefits from an R&D credit. Companies can even use the R&D tax credit to offset up to $250,000 of their payroll taxes per year for up to five years. However, businesses must meet specific criteria to qualify.
The New IRS R&D Tax Credit Memorandum
The IRS became significantly understaffed over the past few years, and it forced the organization to utilize human capital more efficiently. R&D tax credit claims take up a lot of the agency’s time, and it wanted to make the process more efficient.
On October 15, 2021, the IRS released a memorandum updating its R&D tax credit guidelines. Businesses & accountants utilizing this tax credit should take note of these changes. The memorandum establishes new reporting requirements for businesses c=claiming the R&D tax credit.
What’s Required for the R&D Tax Credit?
The new guidelines set additional compliance requirements for R&D tax credit recipients. You must follow these procedures to ensure your research and development tax credit claim passes IRS muster:
Identify All Business Components Related to the Section 41 Credit Claim For the Tax Year
The new IRS guidelines require you to document all the business components related to your credit claim. This rule requires you to identify the business areas you’re improving through your research and development. Applicable business elements include products, processes, or techniques the business implements to advance its R&D agenda.
Identify Research Performed and Names of Researchers for Each Research Activity
If you want to claim the R&D credit, you must also identify all research performed on the project, the people who performed it, and the research’s ultimate purpose. You must keep accurate records of your researchers, their activities, and their goals to ensure compliance with this new rule.
Provide Total Qualified Expenses
Finally, you must submit a detailed breakdown of the total qualified expenses you’re claiming. The breakdown should include employee wages paid, supply costs, and contract research expenses.
When Do the New R&D Tax Credit Guidelines Start?
The IRS issued its memo on October 15, 2021, but it allows a grace period After January 10, 2022, taxpayers will have a one-year grace period that gives them 30 days to perfect their R&D credit claim before the IRS makes its ruling. Businesses claiming the R&D tax credit must submit the information specified above to receive the credit.
How Do the Updated IRS R&D Guidelines Affect Businesses?
These updated guidelines will make it easier for the IRS, but businesses will have additional reporting requirements. Fortunately, businesses will one year to adapt to the new guidelines before they take full effect. As long as you maintain accurate records of your R&D activity, you are in good shape. However, you may need to step up your record-keeping to satisfy the updated guidelines. Make sure you’re accurately tracking every dollar you spend on R&D to avoid compliance issues down the road.
Get Help from R&D Tax Credit Experts
The R&D tax credit might seem overwhelming at first, but it could be extremely valuable for your business. Don’t let the new reporting guidelines discourage you from taking advantage of this lucrative tax credit. Our Tax Hack pros are R&D tax credit specialists, and they can help you get the most out of this government incentive. Check out these R&D tax credit case studies to see how we’ve helped clients in the past, or set up a complimentary R&D tax consultation with one of our Tax Hack experts. You can also try out our R&D tax credit calculator to see how much you can save.