Claiming R&D Tax Credits Retroactively

calculating research and development tax credits

Does your business need you to cut it some slack this year? If your business is struggling to stay afloat, it makes sense to keep cash in the coffers. Investigate these potential breaks available through the Internal Revenue Service.

Directive and Increasing R&D Credit

There are some new guidelines for examiners of Large Business & International ($10,000,000+) when it comes to increasing research and development expenses. If the company is expensing R&D costs on financial statements, the new guidance aims to provide an efficient way to determine QREs (qualified research expenses). A new Directive was filed on Sept. 10, 2020, that clarified the Directive previously issued Sept. 11, 2017. 

Examiners can now accept the Adjusted ASC 730 Financial Statement as proof of qualified research expenses. The Directive is only applicable to businesses using the U.S. GAAP (Generally Accepted Accounting Principles) protocol in preparing Certified Audited Financial Statements. According to the IRS, R&D expenses must be mentioned in the CAFS as a separate line item included with the income statement, or alternatively as a separate note.

The fallout of the TCJA (Tax Cuts and Jobs Act) is still reverberating. It’s important to weigh those changes and the effect they have on R&D spending and taxation. Some changes won’t affect taxpayers until 2022

5-Year Carryback

Recently, section 2303(b) of the CARES Act (Coronavirus Aid, Relief, and Economic Security) made it possible for businesses to carryback net operating losses (NOLs) incurred in the previous last three years to within the last 5 years. A current loss can be carried on a previous year’s income tax return that was taxed at a higher rate. This should allow businesses affected by the pandemic to claim refunds or reduce the previous years’ tax burden. 

If businesses qualified for but didn’t claim R&D tax credits for previous years, they can do so retroactively. Applying current and previous losses toward years with higher tax rates will help increase reserves within your corporation today. Organizations that have never taken advantage of the R&D credit will want to consider it this year.  

Available R&D Tax Credits

Tax credits and strategies that can be claimed retroactively are worth looking into. 

  • Claiming 100% first-year depreciation and applying NOL to a previous tax year with a higher rate.
  • QIP claims for previous year improvements to non-residential properties could qualify for adjustment under the retroactive correction the CARES Act made to the TCJA with regard to these improvements.
  • Business interest deductions have been retroactively increased temporarily by the CARES Act.
  • TCJA disallowance of large business losses has been suspended for years 2018-2020.

The Tax Cuts and Jobs Act created a disadvantage for individuals that incurred large business losses after 2017. This disadvantage is suspended for the first two years by the CARES Act. It remains to be seen whether it will be necessary to extend this suspension through the years 2021 to 2025.

In order to claim R&D credits, documentation is key. Make sure to have the supporting records to back up your R&D claim. Expenses need to directly relate to research and development-associated activities. With so many changes to the tax code in the last three years, businesses may not realize which R&D credits they are entitled to claim. 

Product design and redesign, new formulas and processes, different packaging, personnel changes, and outsourcing are among some research and development categories that qualify your business for the R&D credit. In this especially difficult year for business, don’t get left behind when it comes to taxation. Contact us to see what your organization may qualify for.