With the expansion of the Employee Retention Credit (ERC), there has been a flurry of amended returns for companies that previously were unaware of the credit or were ineligible under the initial statute. As more and more companies become educated on the credit and their eligibility, there has been confusion over the timeline to submit ERC claims.
For several years, CTI has championed construction companies’ eligibility for the credit for increasing research activities (“R&D tax credit”) under Section 41. We have worked with numerous construction companies to successfully identify, calculate, and substantiate the credits. The most recent tax court opinion lends support to the qualification of many aspects of design-build construction projects.
Current State of Section 174
As discussed in our recent blog, the Tax Cuts and Jobs Act (TCJA) of 2017 included a delayed provision that requires taxpayers to begin capitalizing and amortizing research and experimental (R&E) expenditures under Section 174 for tax years beginning after December 31, 2021. Prior to this provision, taxpayers had the option to deduct R&E costs in connection with the taxpayer’s trade or business during the taxable year incurred. Starting in tax year 2022, R&E costs will need to be capitalized and amortized over a 5-year period for domestic expenses and over a 15-year period for foreign research, beginning with the midpoint of the taxable year in which such expenditures are paid or incurred.
Recently, the Internal Revenue Service (IRS) published its annual Dirty Dozen list, which is intended to raise taxpayer awareness of potential scams and fraudulent tax practices. The list includes cautions against falling prey to scammers calling and texting to pose as IRS or state tax officials, reminding taxpayers that the IRS initiates contact with taxpayers primarily through regular mail and never through email, text, or social media. Additionally, the IRS advised against acting on tax tips posted on social media, noting a couple of specific tax schemes that have recently gone viral amount of tax fraud.
Two recent court opinions – Moore v. Commissioner and Little Sandy Coal v. Commissioner – reiterate the pitfalls of claiming the Research & Development (R&D) Tax Credit without sufficient documentation. In both cases, the courts completely disallowed the taxpayers’ R&D tax credit despite recognition that the taxpayers undertook R&D activities and had some level of R&D expenses. The issue was that the taxpayers did not meet their burden of proof to show that all of the activities and associated expenses qualified, and the taxpayers did not provide a reasonable basis for estimating what portion could be properly included.
Now more than ever, recent court precedence has created the need to partner with a firm that understands your industry to maximize Research & Development tax credits. This article explains the result of Little Sandy Coal vs. Commissioner and why it’s important to every organization.