The federal research and development tax credit (R&D Credit) incentivizes business investment in scientific and technological development to spur long-term growth opportunities. Be sure your organization is current on the details associated with two recent updates to R&D Credit compliance requirements.
Two important recent actions that affect the R&D Credit are the impact of the Office of Chief Counsel IRS Memorandum Number 20214101F1 (IRS CCM) and the amendment to IRC Section 174.
Here's what employers need to know to support their compliance efforts and maximize R&D Credits for which they may be eligible.
IRS Chief Counsel Memorandum (CCM)
The IRS CCM focuses on required documentation when filing the R&D refund or credit on a tax return. Released on September 17, 2021, it went into effect as of January 10, 2022. The IRS CCM provides guidance to the IRS on what constitutes acceptable documentation when filing R&D Credit refund claims.
The CCM specifies that at a minimum, the following data now must be included with refund claim filings as related to the R&D Credit: All business components that relate to the research credit claim; for each business component: all research activities, individuals performing each research activity and the information each individual sought to discover, and total qualified wage, supply and contract expenses for the claim.
Earlier in January 2022, the IRS released FAQs on its website related to the IRS CCM to assist taxpayers in understanding how to respond to the new requirements. The IRS also provided Interim Guidance in the form of a Memorandum2 (Guidance Memo). The Guidance Memo provides clarification and details such as descriptions of the additional requirements in the IRS CCM, further explanation of the transition period and the steps the IRS will take to determine the research credit claim validity. Taxpayers filing for a refund claim including the R&D Credit after 1/10/2022 should become familiar with the IRS CCM and the Guidance Memo and discuss the impact on their business with their tax preparer.
Research and experimental expenditures amortization
The Tax Cuts and Jobs Act of 2017 impacted the deductibility of research and development expenditures for tax purposes, effective for tax years beginning after December 31, 2021. IRC Section 174 of the Act was amended by P.L. 115-97: Law Sec. 13206. Under the amended law, research expenses under Internal Revenue Code Section 174 must be amortized over five years (foreign research expenses over 15 years). Prior to the change, taxpayers could elect to either amortize research expenses or expense in the year incurred.
There are other proposed bills that would repeal or postpone this amortization requirement. Additionally, there are other proposed bills that seek to delay or repeal this requirement. Taxpayers may want to consult with their CPAs to determine which steps will be necessary to comply with the new requirements effective January 1, 2022.
Learn more and stay informed
To stay up to date and learn more about how your organization can benefit from the R&D Tax Credit, visit our resource site at ADP.com/TaxCredits-RD
1Field Advice 20214101F
2Control Number: LB&I-04-0122-0001 dated January 3, 2022
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