IRS Extends Transition Period for Perfecting R&D Tax Credit Claims Until January 10, 2025

If you’re a business that has claimed research and development (R&D) tax credits or plans to amend your return to do so, here’s some important news: The Internal Revenue Service (IRS) has granted an extension for perfecting R&D claims. Now you have until January 10, 2025, to ensure your R&D tax credit claims meet the required criteria.

What is the R&D Tax Credit?

The R&D tax credit was designed to incentivize businesses of all sizes to invest in developing or improving products, processes, techniques, formulas, or software. It provides a federal dollar-for-dollar credit, generally ranging from 10% to 16% of eligible expenses. Thirty-eight states also offer credits for eligible in-state spending.

The Transition Period Extension

In October 2021, the IRS introduced new requirements for R&D tax credit refund claims, originally scheduled to take effect on January 10, 2022. These requirements outlined the necessary information taxpayers must include for their claims to be considered valid.

Last year, the IRS extended the transition period during which taxpayers had 45 days to perfect a deficient R&D claim for refund. Initially, this extension was set to end on January 10, 2024.

However, as of November 1, 2023, the IRS has further extended this transition period, giving taxpayers an additional year. This means you now have until January 10, 2025, to perfect your R&D claims for refund.

What Constitutes a Valid R&D Tax Credit Claim?

The IRS guidance specifies the criteria for a valid R&D tax credit claim:

1. Identify all the business components to which the Section 41 research credit claim relates for that year.
2. For each business component, identify all research activities performed and
3. name the individuals who performed each research activity,
4. as well as the information each individual sought to discover.
5. Provide the total qualified employee wage expenses, total qualified supply expenses, and total qualified contract research expenses for the claim year, using Form 6765, Credit for Increasing Research Activities.

Reasons for the Extension

The exact rationale behind the extension remains unclear, but there are several possible factors at play:

• Backlog of Returns: The IRS has been dealing with a backlog of returns, prompting it to allocate resources to address this issue. The extended transition period allows more time for reviewing claims, especially if the IRS has not consistently met its goal of determining claim deficiencies within six months of receipt.
• Potential for In-Depth Guidance: The IRS might be considering releasing more comprehensive guidance in addition to what was issued on January 3, 2022. This could require extra time to gather and incorporate feedback from R&D claims submitted over the past year.
• Data Gathering: Extending the transition period allows the IRS to continue collecting data, especially if the backlog persists, and not enough returns have been processed to draw meaningful conclusions. They may be contemplating whether to further extend the 45-day perfection period or make it a permanent feature.

Regardless of the precise reason for the extension, this development is good news for taxpayers seeking to amend their claims and access the R&D tax credit.

Next Steps

In addition to the extension, the IRS has updated its Frequently Asked Questions (FAQ) section to include a sample submission, providing clarity to taxpayers on how to best provide the required information for an R&D credit claim for refund. This example outlines best practices for presenting information related to business components, research activities, employee details, sought-after information, and qualified expenses, such as wages, supplies, computer leasing, and contract research expenses. This guidance aims to streamline the process for taxpayers seeking to benefit from the R&D tax credit.

If you have a rejected R&D tax credit claim and would like to perfect it, please contact Tonneson.