IRS Releases Memo Defining Requirements for R&D Tax Credit Claims

For companies submitting claims for the R&D tax credit, the IRS is clearly defining requirements to prove the validity of the refund. The memo underscores the approach we have always taken in supporting our clients’ R&D claims. Not all practitioners or R&D software follow these guidelines. But we always have. Our R&D platform backed by tax experts strictly adheres to IRS guidelines.

To support an R&D claim, the IRS states that for each business component, companies need to:

• Identify all research activities
• Name the individuals who performed the research activity, and
• Describe the information each individual seeks to discover

R&D documentation also needs to detail:

• Total qualified employee wage expenses
• Total qualified supply expenses, and
• Total contract research expenses for the year.

These requirements define what information companies should provide with their claims, what format they should use, and how the statute of limitations applies.

Claims for the R&D credit take up significant time and resources for both the IRS and taxpayers. Enforcing requirements for claiming the R&D tax credit is part of the IRS’s efforts to manage issues with the credit and IRS resources. The requirements allow the IRS to determine upfront if an R&D claim should be paid immediately or needs additional review.

The IRS is offering a grace period until January 10, 2022. Once the grace period expires, there will be a one-year transition period. During that time, taxpayers will have 30 days to correct an R&D claim before the IRS makes a final determination on the claim.

For companies already claiming the R&D tax credit and those that are just beginning to determine their eligibility, it is critical to be thorough when documenting qualified research activities and expenses. To reduce your tax burden with the R&D tax credit, you have a responsibility to make sure it’s defensible by adhering to IRS guidelines and properly tracking expenses. Clarus R+D can help you claim R&D tax credits without stress or confusion.