Businesses and individuals looking to recoup part of their capital spent on research and experimentation of products and processes now have a clearer roadmap on how to do that.
The Internal Revenue Service has unveiled the Chief Counsel memorandum, laying out just what information the IRS requires to validate a research credit claim. The memorandum aims to spell out instructions in plain language, thereby facilitating valid claims by taxpayers while reducing the number of claim-related disputes.
Researching a better way
It’s important that taxpayers understand just what’s expected from them when making a claim for the research and experimentation (R&E) credit. The IRS gets thousands of R&E claims every year totaling hundreds of millions of dollars from businesses, corporations and individuals.
Administering the credit, the IRS says, consumes a lot of the agency’s resources. A substantial number of A&E credit claims have to be audited to ensure they meet the requirements of IRC Section 41, taking time and money.
The IRS hopes to streamline the process through the use of the Chief Counsel’s memorandum, giving those who claim the credit clear instructions on what information is needed. If that’s done, the IRS says it can quickly and more efficiently determine if the R&E claim for a refund is valid—or if more examination is needed.
Here’s how the new process works: The Chief Counsel memorandum specifies that for a Section 41 research credit claim for refund to be considered, the taxpayer has to provide certain specific information when the claim is filed.
This can be viewed as a three-step process:
STEP 1: Identify all the business components that the Section 41 research credit claim applies to for that year.
STEP 2: For each business component, identify all research activities performed and name the individuals who performed each research activity, as well as the information each individual sought to discover.
STEP 3: Provide the total qualified employee wage expenses, total qualified supply expenses, and total qualified contract research expenses for the claim year. Use Form 6765, Credit for Increasing Research Activities.
Grace period provided
Taxpayers are being eased into the new procedure with a grace period until Jan. 10, 2022. After that date, a one-year transition period starts, where taxpayers who don’t comply with the new instructions get a 30-day reprieve to perfect their claim for the R&E credit.
The IRS says it will have more details on this new process later, but taxpayers can start sending the new required information now. Also, look for the agency to do more research of its own with stakeholders on research credit issues.
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Source: IR-2021-203