The Ultimate Calculus of the Research Credit: Claiming and Sustaining the R&D Tax Credit
Who is able to claim the R&D tax credit?
The Research and Development (R&D) tax credit is one of the most powerful government incentives available to U.S. businesses of any size, and in virtually any industry. The R&D tax credit benefits U.S.-based companies attempting to develop new or improved products or processes used in their trades or businesses. Qualification for the credit does not depend on the success of the initiatives, but rather on whether the taxpayer has incurred expenses related to performing Qualified Research Activities (QRAs) intended to eliminate technical design or development uncertainty through a process of experimentation. This generous incentive is particularly helpful for small businesses and start-up companies because it can provide significant financial support for early stage investment expenses which would otherwise not be offset until potential commercialization and subsequent profitability.
Is there additional audit risk related to R&D tax credit claims?
Yes, while no longer labeled a Tier 1 Issue by the IRS, which previously required additional scrutiny that could potentially lead to audit, taxpayers should nonetheless still expect some degree of heightened attention when claiming R&D tax credits. This heightened risk, however, should not dissuade qualified companies from claiming R&D credits to which they are entitled. Rather, it should alert companies of the need to work with R&D tax credit specialists to diligently evaluate applicable costs and properly document qualifying projects and activities.Get in Touch
Your IRS examination checklists
While each audit exam team is different, the IRS Audit Technique Guide recommends the following approach to agents:
- Review the research credit computation for accuracy.
- Determine whether the expenses claimed for the research credit are qualified research expenditures (QREs) under section 41(b) (i.e., wages, supplies, and contract research expenses).
- Determine whether the activities constitute qualified research under section 41(d) (the four-part test).
- Audit the consistency requirement (between tax credit year and base period computations).
- Confirm compliance with substantiation and recordkeeping requirements.
In recent guidance, the IRS implemented more rigorous documentation and substantiation requirements for R&D refund claims filed on amended returns. At a minimum, an R&D refund claim must now satisfy the following requirements:
- Identify all of the business components to which the claim relates for the given tax year.
- For each business component:
- Identify all QRAs performed (direct R&D, support and supervision of R&D);
- Identify all individuals who performed each QRA; and
- Identify the information each individual sought to discover through research and experimentation.
Therefore, for amended R&D tax credit claims, it is important for taxpayer workpaper submission to comply with each of the bullet points above as a starting point for ensuring a potentially smooth audit process.
How can Anchin help you?
With decades of R&D tax credit audit experience, we fully understand IRS audit techniques and procedures. Whether your claim was filed by Anchin professionals or by another provider, we can guide you through the difficult audit landscape while keeping costs down and sustaining the maximum tax credit possible. We will help you substantiate, clarify, and communicate your justified position on exam and at appeals. Our reputation for filing comprehensive and well documented R&D tax credit claims has earned us significant credibility with IRS audit teams.
The IRS always comes prepared and that’s exactly what you must do. Anchin’s R&D Tax Credits team supports clients interested in claiming the R&D credit for the first time, those whose research claim was completely denied, those who have difficulty meeting the contemporaneous documentation requirements needed to support their R&D claim, or clients who need to reassess their R&D credit calculation because the nature of their business has changed. Our team is well versed and equipped with tools to assist you in maximizing the sustainability of your research credit claim.