Six questions from the R&D tax webinar
Q. What is the look-back period to take the R&D tax credit?
A. Companies looking to claim R&D tax credits on prior year tax filings are in luck. In general, a corporate return can be amended within three years of the date when the original return was due or when it was filed; whichever is later. Depending on the taxpayer’s circumstances, other factors may allow the capture of R&D tax credits beyond three years. Please note that on Oct. 15, 2021 the IRS released guidance (Chief Counsel Memorandum 20214101F) related to research credit refund claims. The memorandum set forth additional taxpayer requirements for research credit refund claims to be considered valid. These changes are applicable for all taxpayers filing refund claims on amended returns. To satisfy these requirements and ensure your research claim is valid, it is best to work with a R&D tax credit professional
Q. Does this apply for LLC?
A. Yes, the R&D tax credit is available to corporations and pass-throughs. Companies can claim the R&D tax credit regardless of entity type – including sole proprietorships. Eligibility for the R&D tax credit centers around the activities that your business performs. Activities are evaluated using a four-part test provided by the IRS. An R&D tax credit professional would be able to review the activities against the qualifying criteria to assist in determining whether the activities rise to the level of R&D.
Q. I'm confused on the comment that it is okay if you are paid for your R&D. I'm a subcontractor and if I am doing R&D on behalf of a customer and being paid for it, are you saying that qualifies for the credit – I get paid whether successful or not?
A. Yes, this work could potentially qualify for the credit. However, to know for sure will require a review of the contract between you and your customer. An R&D tax credit professional would be able to review your contracts and give you a better idea of whether these activities qualify. In order to claim these costs towards the R&D tax credit the contract must not be deemed “funded.” The term “funded” has a specific legal definition that includes a two-pronged test, which has been refined by years of caselaw. This definition is not always intuitive, thus reinforcing the importance of having a R&D tax credit professional conduct the contract analysis.
Q. Is there a benefit once we no longer qualify for the payroll tax credit? I don't want to calculate something that will not benefit the company.
A. Yes, there may still be a benefit. Once a company no longer qualifies for the payroll tax credit, a taxpayer may still claim the R&D credit. The R&D credit will be used to offset income tax liability. If no income tax liability exists, the credit must be carried back one year and carried forward twenty years. The twenty-year carryforward provides companies with an extensive timeframe to be able to utilize the R&D tax credit.
In addition, many states offer R&D credits. Some states allow for the credits to be refundable, while other states allow for the credits to be sold on an exchange. Thus, even if a young company is not yet paying income tax, it still may be able to benefit from an R&D credit
Q. If a U.S. entity pays a foreign vendor for work used in the development of R&D, does that spend qualify or is it excluded?
A. Yes, those expenses could qualify if the activity is performed within the U.S. It would be important to determine whether these expenses were for goods that were used in the R&D process, or whether the costs were for R&D services. The R&D tax credit is designed to incentivize companies to conduct development activities within the U.S. Therefore, as long as activities are performed by individuals located within the U.S., they may still qualify for this tax credit.
Q. What happens if I generate more R&D tax credit than I can use? Do I lose the credit?
A. The R&D tax credit can often be more than the tax liability of a company in any given year. This is good news for companies because the unused portion of the R&D tax credit for a given year is not simply lost. Instead, unused R&D tax credits can be carried back one year and carried forward twenty years until utilized. Many states also have their own specific rules related to how long R&D tax credits can be carried until utilized.
Jessie Cahill, Partner, Research & Development Credits practice
Scott Ibbotson, JD, Manager, Research & Development Credits practice
Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute legal or professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice specific to, among other things, your individual facts, circumstances and jurisdiction. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its partners, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.
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