By: Michael Donahue, CPA, MT, CFP
As we close the books for the 2021 year, there is no need to close the door on tax planning strategies for that year. The Federal Research and Development (R&D) Credit is available to reduce your tax liability for the years 2018 to 2021. New IRS guidance, and a few more requirements in some cases, may provide tax credit for your enterprise’s research and development activities.
If your company operates in software development, technology, architecture, engineering, manufacturing, or is a contractor, it may be entitled to an approximate 7% credit or refund on eligible expenditures. We have also seen an increased availability of the R&D credit to the expenditures required to create internal-use software.
The R&D Credit has a four-part test, which requires a company to 1) create or improve a product or process; 2) which is technological in nature; 3) through a process of experimentation; 4) to eliminate an uncertainly. Typical expenditures eligible for R&D credit purposes include wages, supplies, and outside contractor costs.
Often, the R&D credit was missed in the years 2018 through 2020. In these situations, information, in addition to Form 6765, will be required for the refund claim. However, in claiming a timely R&D Credit for the 2021 year, the preparation of the Form 6765 is sufficient.
The IRS has recently expanded reporting requirements for R&D Credit refund claims. This includes:
- identification of the products and processes,
- for each new product or process, a listing of the specific research activities including:
- the individuals who performed the activities, and
- the information each of those individuals sought to discover.
Importantly, the IRS has recently noted that it will review all R&D Credit refund claims filed.
Last, companies that have availed themselves of the Employee Retention Credit will need to address the interaction of the wages used for this credit with the wages used for the R&D Credit.
If your enterprise performs activities described above and you aren’t sure if you qualify for the R&D credit, please call on us. You may be missing monies due to you and your enterprise.