The IRS recently released a memo outlining new informational requirements for amended tax returns claiming a Research and Development (R&D) tax credit, effective January 10, 2022. Depending on the specifics of your business, the impact could be minor or extremely time consuming.
Specifically, any amended tax return that claims an R&D credit, whether claiming a refund or a credit carryforward, must:
- Identify each “business component” under the Internal Revenue Code
- Provide the following for each business component:
- Identify all research performed
- List all individuals who performed qualified research activities
- List all information that each individual above sought to discover
As an example of the potential impact, if you have 100 employees performing R&D, you must separately list every employee as well as what specific research each employee is performing.
In thinking about these new changes, below are two key questions to consider.
How Can You Minimize the Impact of the New R&D Informational Requirements?
Many taxpayers often forego filing an R&D credit to save on fees or internal accounting time. However, while it might not seem intuitive especially in a loss year, it may be more beneficial to go ahead and claim the credit on your 2021 returns. Some taxpayers will file a credit for a nominal amount, usually $1. This nominal credit will lock in certain items that must be elected on a timely filed tax return. This allows the taxpayer to essentially forego their R&D credit in the current year, but “leaves the door open” to amend their tax return in a future year.
Due to the potentially onerous informational requirements outlined above, amending a tax return could now be much more time consuming and costly, both for your internal accounting department and your tax preparer. Even in a year in which the R&D credit provides no benefit, it is likely much more cost effective to timely file the R&D credit, rather than planning to amend.
As each tax situation is different, it’s important to weigh the benefit of taking the credit now or dealing with the additional time incurred for the amendment process down the road.
Will These New R&D Reporting Requirements Change?
There are indicators that suggest the IRS may provide further guidance at some point, altering these informational requirements. Namely, the memo did not include any public comment period or warning. Many tax professionals were unaware the IRS was even considering these changes. And some, such as The National Taxpayer Advocate, an independent organization within the IRS, are skeptical at the practicality of these changes.
However, until future guidance is issued, for the upcoming 2021 tax filing season and beyond, it’s important to discuss with your tax advisers whether timely filing for the R&D credit, rather than planning to amend, makes the most sense.
Contact a member of your service team to discuss this topic further.
Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.