R&D Tax Credit Refund Claims: IRS Guidance Reinforced

R&D Tax Credit

A recent Chief Counsel memorandum announced by the IRS on October 15, 2021 (Field Attorney Advice memo 20214101F) provides legal advice on information required for a research credit claim to be considered valid.

The IRS News Release (IR-2021-203) explains that “claims for refund” should be supported by extensive disclosures about the business components to which the claim relates. The R&D Tax Credit is a federal dollar-for-dollar cash savings for performing activities related to the development or design of a new or improved product, process, software, formula, invention, or technique. Not only can you use it against your federal tax liability when in a tax-positive position, but you can now monetize the R&D Tax Credit to offset the employer-portion of payroll taxes if you are a “start-up” business.

The IRS said in the News Release that taxpayers must provide the additional information identified in the memorandumbeginning on January 10, 2022. A claim for refund refers to taxes paid with previously filed returns; typically made by filing an amended tax return. However, it’s possible that the IRS could begin requesting this level of documentation anytime it challenges an R&D Tax Credit.

While there appears to be some ambiguities in the IRS guidance, one thing is clear: the need for documentation to support R&D Tax Credit claims is of the utmost importance and in the case of the January deadline, timing is critical. If R&D Tax Credits are to be claimed on an amended tax return, timing is of the essence.

Next Steps:

Whether you are looking to amend prior year tax returns to claim the R&D Tax Credit or are looking to make future claims on originally filed tax returns, Withum can provide the needed guidance to put your company in position to claim the most appropriate tax credit, along with the required documentation. Our Firm’s experts are focused on the nuances of the R&D Tax Credit (and government’s expectations for taxpayers when filing claims), working with researchers, scientists, engineers and software developers to understand their unique situations. The initial consultation iscomplimentary! What do you have to lose?

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Contact Withum’s R&D Team Members to further help address your questions.