New IRS rules tighten requirements for amended R&D credit claims

As of January 10, 2022, the IRS will have new documentation requirements for startups and other companies that are filing amended returns claiming the research and development (R&D) tax credit.

New R&D Tax Credit Rules I Kruze Consulting

The Research and Development tax credit is an important source of funding for Kruze Consulting clients, and we are closely monitoring these new requirements and any updates from the IRS to make sure our clients are prepared to meet these more stringent rules. 

Why are these changes being instituted? According to the IRS, they receive thousands of R&D research credit claims each year, and examining them takes “significant resources.” To reduce that burden, the IRS is essentially shifting it to the taxpayers, who will need to provide a much higher level of documentation if their claims for the R&D tax credit are considered deficient.

What are the IRS’ new R&D documentation requirements?

For the next year, the IRS established a transition period during which any R&D credit claims they deem deficient will need to be corrected by supplying additional documentation within 45 days after they notify you. Starting in 2023, the IRS can simply reject a claim for R&D credits if you don’t provide the additional documentation with your amended return. To document your claim, you’ll need to:

  1. Identify all the business components that are the basis of your claim. Business components include “any product, process, computer software, technique, formula, or invention that will be sold, leased, licensed, or used by a business.”
  2. Detail all research performed by business components.
  3. Identify all research activities performed and identify the individuals who performed it. The IRS has clarified that individuals can be identified by title.
  4. Identify the information that each individual tried to discover.
  5. Provide the total qualified employee wage expenses, supply expenses, and contract research expenses for the claim year using Form 6765.

Further, if the IRS rejects a claim that’s not properly documented, the taxpayer is barred from recovering tax credits and refunds, and prevented from taking legal action. That means if you don’t properly document your R&D tax credit claims, your company could lose out on tax credits that you’re entitled to.

“We recommend that you use a CPA with extensive startup experience who is also well-versed in R&D tax credits,” said Vanessa Kruze, CEO of Kruze Consulting. “You should work with the same CPA that does your tax returns, because the IRS may have questions about your R&D credit claim. It’s the part of your return that’s most likely to trigger an audit.”

Making a successful credit claim with the IRS for your startup

The new requirements are a significant burden to startups, and you’ll need the help of skilled R&D tax credit professionals like the tax experts at Kruze Consulting. The limited 45-day window to document a claim on an amended return, and next year’s requirement that documentation must be submitted with the amended return, means that your company needs to focus on R&D documentation before it’s needed. Our tax team can help you document your startup’s qualified research activities and expenses to help you get the tax credits you’ve earned. For more information, please contact us.

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