Rewarding innovation In All Industries
The U.S. Research and Development (R&D) Tax Credit was created in 1981 to incentivize businesses to take risks and undergo research activities to develop or improve their products, processes, or software. The research and development tax credit was introduced through the Economic Recovery Act of 1981 offering reimbursement for business activities and resources utilized during the research.
Due to a 2015 provision, more companies than ever can benefit from the R&D tax credit for research activities they’re already doing.
Proposed Revisions to Form 6765 - New R&E Credit Reporting Requirements
On September 15, the IRS proposed a revised Form 6765 for reporting research credit claims on tax returns. The revised form aims to provide taxpayers with a consistent format, improve tax administration information, and enhance effective management of Research Credit issues and resources. The revised form is available on the IRS website.
Form 6765 is set to undergo significant changes, including a new Section F that requires taxpayers to list every business component they claim a research credit. This includes detailed information, including the narrative “information sought to be discovered” and the identification of “one or more alternatives evaluated in the process of experimentation.” The IRS imposed these requirements through an October 15, 2021, Chief Counsel memorandum, amending the instructions to Form 6765 to mandate this information for refund claims only. The revised form will apply these new requirements on refund claims on original and amended returns.
These proposed regulations, if implemented, will put a significant cost on taxpayers, particularly major firms with significant R&E spending. With possibly hundreds of company components, the impact on those taxpayers might be enormous. This barrier may disincentivize taxpayers from conducting vital research, negating the aim of the Section 41 credit. The IRS has asked for feedback on the proposed form by October 31, 2023.
in federal R&D credits are given out to companies across the US each year.
Impact of the Tax Cuts and Jobs Act (TCJA) on R&D
Under the TCJA, research and development expenses can no longer be fully deducted in the filing year. Now, domestic expenses must be amortized over five years, and international expenses over fifteen years.
For the first taxable year after the change takes effect, taxpayers can file a statement with their federal income taxes to change their accounting method. Changes made in subsequent years require a Form 3115 Application for Change in Accounting Method.
Not Just For Lab Coats
R&D Tax Credits are available to any business in any industry that performs qualifying research activities. Businesses are no longer required to strictly develop a product or process that is unique to their industry; it only needs to be unique to them.
Although a wide variety of businesses qualify for the R&D tax credit, less than 1/3 of companies utilize the tax credit, and those who do often do not reap the maximum amount of credits they’re entitled to.
National Tax Group assists companies of all sizes and industries in obtaining R&D credits by providing reliable documentation that will withstand any level of IRS and state authority scrutiny.
To benefit from the R&D tax credit, all research activities performed by qualifying companies must be thoroughly documented. Our team of tax-saving experts will create and provide the needed documentation.
How Do You Qualify?
If you are not sure if the activities you want to claim to qualify your business for the R&D tax credit, National Tax Group will be able to give you a quick and free assessment to make it easy on you. A few examples of activities that qualify are:
- Creating new or improved products or formulations
- Enhancing the functionality of existing products or formulas
- Creating new or improved processes within production or execution
- Assisting customers with troubleshooting technical issues
- Creating new or enhanced software to be used or sold on the market
- Applying for patents and prototype development costs
DO YOU PASS THE 4-PART TEST?
The research activities are done to improve the quality, function, or reliability of a process or product.
The activities must identify information to remove ambiguity in the development or improvement of a production process.
The activities must involve simulation, logical trial, and error, assessing alternatives, and refining hypotheses.
Technological in Nature
The research done relies solely on physical sciences, biological sciences, computer sciences, or engineering.