Tax Incentives Blog

You Don’t Need a Time Machine to Claim R&D Credits

Written by Mark Echols. Updated Nov 27, 2018.

TimeTravel

The Federal Credit for Increasing Research Activities (“R&D”) tax credit has been available to companies since 1981, but the complex computational rules surrounding the credit have traditionally been a hurdle for companies to claim the benefit.

Because the credit is for increasing research activities over a historical base amount, well-established companies may need to analyze past R&D activities and sales revenue. For example, if a 35-year-old company with R&D activities and sales revenue from 1984 – 1988 wants to claim R&D tax credits in 2018, the company would have to look back to books and records 30 plus years ago to properly calculate and claim the R&D tax credit.  Chances are, they’ll need a time machine to go back to the mid 80’s to produce the needed documentation.

Avoid Time Travel with the Alternative Simplified Credit method

Since most companies do not readily have access to the DeLorean and Flux Capacitor from the film “Back to the Future,” the Alternative Simplified Credit (ASC) was enacted in 2007 as an optional approach for calculating R&D tax credits. The ASC calculation only looks at the prior three years of R&D expenses to determine the base amount, making the process and methodology of calculating credits an easier exercise for businesses.

However, one big issue existed with this credit calculation method.  No, it wasn’t that you had to be traveling at 88 mph and required 1.21 gigawatts of power. It was that companies had to make the ASC election on an originally filed tax return, which effectively barred taxpayers from electing ASC on amended tax returns for earlier years.  Again, time travel appeared to be necessary to go back to those original filings.

In recognition of this issue, regulations introduced in June 2014 allowed companies to go back to open tax years and make retroactive ASC elections. You may make the ASC election under section 41(c) (5) on an amended return, but only if an R&D credit was not previously claimed under section 41(a) (1) on the original return or an amended return for that tax year, and only if that tax year is not closed by the period of limitations on assessment under section 6501(a).

This is significant, especially for small and medium sized businesses (SMB). Previously, it was unrealistic for taxpaying SMBs to incur additional time and money to quantify and qualify historical base period information from the 1980’s. Thanks to these new regulations, SMBs can go back and take advantage of credits in multiple prior years without the need for Mr. Peabody’s Wayback Machine.

Dig Up that Time Capsule - R&D Credit Documentation

With the ASC entitling your company to go back to open tax years to claim your R&D credits, you may be asking yourself, what type of documentation is required? 

Per final regulations, “a taxpayer must retain records in a sufficient usable form and detail to substantiate that the expenditures claimed are eligible for the credit.” (IRC Sec. 6001).  As such, documentation is key when qualifying and quantifying the R&D activities and expenses. 

Because of this, it is highly recommended that you claim R&D credits sooner rather than later, when the proper documentation is readily available and the technical employees performing the historical R&D activities are still employed by the company.

The Time Traveler’s Guide – Qualified R&D Credit Specialists

So, if you don’t have access to Doctor Who's TARDIS time machine, and you have concerns over a lack of substantiation and documentation from previous years for qualified expenditures, a qualified R&D credit specialist can help!

Let CTI’s elite tax professionals do the work to navigate through substantiation and documentation issues to achieve a favorable outcome, maximizing credits for your business.

 

Download Free Guide

Topics: R&D Tax Credit

Mark Echols

Written by Mark Echols

Mark leads CTI’s national research and development (R&D) tax credits practice and is involved in all aspects of providing R&D tax credit services to his clients, including: conducting high-level R&D tax credit feasibility analyses, managing complex and comprehensive R&D tax credit studies and defending R&D tax credit claims under IRS and state taxing authority examinations.

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