Whether or not you are a football fan, you probably know the Super Bowl is right around the corner – and it will be played right here in the Golden State at SoFi Stadium. But getting there is only half the battle for the two opposing teams. They know there’s a lot more to be accomplished before the winner takes the prize: the highly coveted Vince Lombardi Trophy.
Racing the clock for the prize
Businesses, much like football teams, must be ready to follow through until the time clock runs out if they plan to reap the rewards. Take R&D tax credit, for example. Knowing that your research activities qualify for a tax credit is just part of the equation. In keeping with the football analogy, it’s only the first down. Next, you need to calculate your expenses and determine which ones will qualify for the credit. Then there’s documentation collection and filing the form 6765 with your tax returns – or amending a prior return.
While the R&D tax credit can provide a tremendous financial boost for businesses, it’s not as easy as ‘naming it and claiming it.’ The IRS has instituted strict rules that are highly complex and nuanced, and they are the ones that determine which expenses qualify.
Which Expenses Qualify for the R&D Tax Credit?
Before moving on to claiming the credit, let’s review the basics. The IRS has issued a four-part stipulation that describes which research activities fit within their guidelines. As outlined by the IRS in Section 41(b), qualified research expenses can be as follows:
1. Permitted purpose. The activity must be intended to develop or improve the functionality, performance, reliability, or quality of a business component (product, process, technique, formula, invention, or software). Note: even if the attempts were unsuccessful, you may still be eligible.
2. Elimination of uncertainty. The goal of the activity must be to collect information that could potentially eliminate uncertainty as to whether or how a product can be developed.
3. Technological in nature. The research activity or innovative findings must be linked to one of the sciences or engineering.
4. Process of experimentation. The activity involves evaluating different alternatives that follow a logical process of experimentation. Even if the experiment fails – but was undertaken to find alternatives to improve the existing performance – then the related expenses can qualify for a refund.
What Industries Qualify?
The phrase ‘Research and Development’ can create a misconception for businesses; they may think that to qualify, their research must involve test tubes and high-tech laboratories. In reality, a broad array of industries may qualify, including (but not limited to):
1. Architecture and Engineering
5. Software & Technology
In the U.S, it’s estimated that only one-third of all businesses that qualify for the R&D tax credit actually apply for it, even though businesses in most U.S. states can qualify, including:
Alaska, Connecticut, Idaho, Kentucky, Minnesota, New York, South Carolina, Wisconsin, Arizona, Delaware, Illinois, Louisiana, Nebraska, North Dakota, Texas, Arkansas, Florida, Indiana, Maine, New Hampshire, Ohio, Utah, California, Georgia, Iowa, Maryland, New Jersey, Pennsylvania, Vermont, Colorado, Hawaii, Kansas, Massachusetts, New Mexico, Rhode Island, and Virginia.
Changes to the Refund Game Plan
On October 15, 2021, the Chief Counsel of the IRS released some game-changing rules: as of January 10, 2022, the IRS requires that businesses include documents along with their R&D credit claim for refund. Since many companies will be caught off guard, the IRS is granting a transition period of one year.
During the one-year transition period, a timely-filed claim that does not meet the documentation requirements will still be considered timely if perfected within a 45-day grace period. We can conclude that ‘perfect’ means that if a claim was deficient in providing subordinate documentation, it will have 45 days to submit the missing information.
If those 45 days lapse and the IRS hasn’t received it, the entire refund claim will be denied. One concrete date to remember is January 9, 2023: that’s the final deadline – or the end of the fourth quarter. No more time will be added to the clock.
Act Now – While Time is on Your Side
The good news is that the window is still open, but time is of the essence. Astute has a methodology in place that meets IRS stringent requirements. Our comprehensive report includes the details required by the IRS, and substantiation of all qualified activities and expenses. Thus, our process safeguards clients by ensuring all documents will be provided.
Over the past four decades, the IRS has appropriated millions of dollars to businesses to incentivize and reward them for their innovative efforts. Before you leave any of your money on the table, give us a call. We are happy to discuss the R&D process with you and provide guidance on how we can help you receive this tax incentive.