In October, 2021 the U.S. Internal Revenue Service (IRS) released a memo relating to a new private guidance requirements regarding research and development (R&D) tax credit claims. If you’re in the United States and have claimed R&D credits in the past, you might be concerned about what this means for you in the future.
We spoke to our internal experts to explore the possible impact of this new IRS statement.
What does a “private guidance” entail?
The memo released by the IRS is considered “private guidance” which at this point is neither binding on the part of the IRS nor applicable to all taxpayers.
In other words, it only applies to the taxpayers that specifically wrote to the IRS requesting guidance. The IRS would need to issue the new guidance in the form of either a Revenue Ruling or a Revenue Procedure for it to be made into a law that all taxpayers would need to follow.
However, at this point we could assume that the memo is suggesting the possibility of stricter guidelines when it comes to compliance. sign that more stringent guidelines are forthcoming.
What was stated in the recent IRS memorandum?
In a nutshell, the IRS stated that millions of dollars in R&D tax credits are provided each year to incentivize taxpayers who conduct qualified R&D activities in the United States. Due to the limited resources available, and to “…avoid paying refunds to taxpayers who have no factual support for their claim,” they’ll be requiring a lot more specificity and detail when it comes to your claims.
Essentially, they’re suggesting that they’re going to be a lot stricter when it comes to handing out tax credits in order to ensure that the taxpayers who are truly entitled and compliant, are the only ones getting tax credits.
Deficient Claims likely won’t get reviewed
They also stated that for
“…a taxpayer to seek judicial review of a disallowed refund claim, the taxpayer must have first timely submitted a refund claim that complied with all of the regulatory requirements, i.e., a valid refund claim.”
So in other words, if your claim is not submitted within the timeline required, and there are any errors in the facts presented, chances are…well, you’re not going to get a chance to resubmit.
It appears that the IRS will be adding significantly more obstacles to the already complicated process of claiming the R&D tax credit.
Boast.AI’s state of the art technology, alongside our in-house R&D tax experts can help ensure that your claims are 100% compliant – BOOK YOUR FREE CONSULTATION
Qualified research activities and expenses for the R&D tax credit
Naturally, in order to qualify for the U.S. R&D credit, you need to be expending costs on research and development.
So unfortunately, your big advertising budget won’t be considered a QRE (Qualified Research Expense).
Qualified Research Activities:
This means anything that is directly related to the research being conducted in terms of the actual “work” being done. Qualified research activities include the development of new or improved products (including software) and processes. It is also worth noting that research efforts do not need to be considered “successful” in order to qualify. You can read more about what types of activities qualify for the R&D tax credit in our R&D tax FAQ.
Qualified Research Expenses:
You probably guessed it by now, but your QREs refer to the actual costs involved in conducting research. These are things like payroll, supplies used or consumed during the R&D process, leased computing costs, and expenses paid to contractors who performed qualified R&D work on behalf of your company.
In order to calculate your eligible tax credit amount, you’ll need to take into account the time, cost, and activities involved in that research.
As stated by the IRS,
“…a taxpayer may claim a credit that is 20% of the excess of the sum of the total wages paid or incurred to an employee for engaging in (or directly supervising) qualified research activities, the cost of supplies used in qualified research activities, leased computing costs, and 65% of any amounts paid to any non-employee to perform qualified research over “the base amount.”…The credit must be properly computed, including only allowable expenses… Calculating total qualified employee wage expenses, qualified supply expenses, qualified leased computing costs and qualified contract expenses are required steps for a taxpayer to determine their QREs and are itemized…”
The caveat is that you need to be very careful that you’re being 100% accurate with your calculations. And to make matters more complicated, you need to specifically attribute the time, costs, and activities back to the experimental initiatives.
Specifically, under the guidance issued in the IRS memorandum, for a research credit claim to be considered a valid claim, taxpayers will need to provide the following information at the time the refund claim is filed with the IRS:
- Identify all the business components to which the Section 41 research credit claim relates for that year.
- For each business component, identify all research activities performed and name the individuals who performed each research activity, as well as the information each individual sought to discover.
- Provide the total qualified employee wage expenses, total qualified supply expenses, and total qualified contract research expenses for the claim year.
Submission of R&D tax credit claims:
Another point made in the memorandum states that,
“…this information must be submitted when the refund claim is filed and be provided with a declaration signed under the penalties of perjury verifying that the facts provided are accurate. Otherwise, the refund claim should be rejected as deficient…rejecting a deficient refund claim may preclude a taxpayer from amending or perfecting their refund claim if the refund claim failed to follow procedural requirements and the statute of limitations to file a new refund claim”
Meaning one of the biggest risks with not ensuring your claims are specific, accurate and compliant, could result in a total rejection of your claim altogether.
Because of the increased scrutiny that the IRS will be giving to R&D credit claims in the near future, it is of utmost importance to hire a provider that can ensure your claim is accurate, well supported, and sustainable. At Boast.ai, we have expert tax professionals that understand the complex laws relating to the R&D tax credit. Additionally, we have developed innovative technology that simplifies and streamlines the process of calculating R&D tax credits as well as producing all of the supporting documentation needed for the IRS to substantiate your claims.
If you’re in need of support resulting from this recent update from the IRS, be sure to book a call with one of our experts and learn how Boast’s technology can help ensure you’re not only accurate with your claim submission, but how we can help you maximize your return as well.