IRS Releases New Requirements for Research Credit Claims
Every year, businesses submit thousands of research and development (R&D) claims to the IRS and state taxing authorities for tax credits in the hundreds of millions of dollars. Both corporations and individuals benefit from credits for research. Claims are filed in accordance with Internal Revenue Code (IRC) Section 41. If substantial, they can be subject to examination by the IRS and states, often using significant resources for both taxing authorities and taxpayers. To improve tax administration and reduce the number of disputes over claims, the IRS released Notice 2021-203 on October 15, 2021. The memorandum is from the Chief Counsel and sets forth specific information that taxpayers will be required to provide when an R&D refund claim is filed with the IRS for it to be considered valid.
New IRS R&D Credit Guidance
The instructions clarify existing Treasury regulation requirements in assisting both taxpayers and the IRS in preparing and examining such claims. The required information will help the IRS consider these claims more efficiently by letting them know upfront whether a claim for refund can be paid immediately or if a further review is needed. The new guidance impacts businesses that have taken advantage of the research credit in the past and those who will be taking advantage of it for the first time.
Taxpayers must provide the following information at the time of filing for their Section 41 R&D credit claim for refund to be considered valid:
- 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 individual who performed each research activity, making sure to include 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.
The IRS is providing a grace period until January 10, 2022, before requiring the inclusion of the above information with Section 41 research credit claims for a refund. After the grace period, there will be a transition period of one year, during which taxpayers will have 30 days to perfect R&D credit claims before the final IRS determination.
The IRS will provide further details; however, it is suggested that taxpayers begin to review their past filings and current procedures if they do not have all the details needed to support refund claims in compliance with this memorandum.
Contact Us
If you have any questions about the information outlined above or would like to learn more about how Klatzkin can help with another tax-related issue, click here to contact us. We look forward to speaking with you soon.
©2021 Klatzkin & Company LLP. The above represents our best understanding and interpretation of the material covered as of this post’s date. The content is provided for informational purposes only and does not constitute accounting, tax, or financial advice. Please consult your advisor concerning your specific situation.