R&D Tax Credit 2022: TCJA’s Latest Provision and How to Cope with It
The research and development tax credit began in 1981 as a temporary tax incentive. But, TCJA rewarded its permanency due to its counter-tax benefits. The R&D tax incentive aids companies belonging to diverse domains to minimize their tax burden. However, the year 2022 is bringing some changes to r&d tax credits.
Back in 2017, TCJA announced a revolutionary change in the research and development R&D deductibility that enacts in the tax year 2022. The provision states that the expenses incurred during research won’t be refunded in the same year. But the costs will amortize up to five years for US-based companies and up to 15 years for non-US companies.
There is a strong belief that Congress may take action before any more strictness and auditory policies pass. Until then, a company needs the below pointers to minimize the impact of the latest policies.
Details the R&D Requires in the Claiming Documentations in 2022
Despite the complex documentation, the R&D tax credit witnessed fraud. Therefore, in addition to the changes in the deductibility of the R&D, the IRS also implemented some restrictions in the claim documentation. These r&d tax changes will likely prevent frequent tax frauds, reports Accounting Today.
Initially, the companies reported the innovations to their working domains only. However, after the McFerrin Decision, the IRS expanded the definition of qualifying research. Now, it is the “specificity requirement.”
It means the companies need to provide solid evidence that the research belongs to specialized individuals. Providing these associated details will reduce the occurrences of inaccurate claims.
- Firstly, the company should detail all the involved business components to build a factual base for the credit claim. Additionally, the company must document the entire research performed by a specific business component.
- Next, the company needs to provide the names of the associated individuals working on the research project. Moreover, it must identify the research part which each individual conducted.
- The claimants must fill out a penalty declaration to ensure the certainty of the facts in the claim documentation. Some common declaration forms are the forms 1040X or 1120X.
- Lastly, the company has to provide the expenditure details such as the qualified employee wage expenses, the supply expenses, the associated contractual expenses, etc. Since expenses vary depending on the company’s domain, experts recommend consulting Form 6765 credit for extended research accomplishments.
Before, the companies provided arbitrary documentation that IRS reviewed after two to three years. Hence, giving the companies plenty of time to prepare the supporting documents. Now, such arbitrary and incomplete claims are not acceptable. Moreover, the IRS rejected taxpayers may lose the benefit of refunding the incurred expenses over an extended period.
The State Distinction of the R&D Tax Credit 2022
The latest R&D amendments have brought some changes to state-level incentives also. Presently, almost 35 US states provide research credits to entrepreneurs to help them drive their business plans.
Many local level credit-offering companies tend to follow the IRS direction for offering the incentive. Therefore, having insight will help understand the eligibility of small businesses.
- Firstly, a company must recognize whether it is eligible for the R&D. Mostly, companies like LLCs, S-corporations, C-corporations are deemed as eligible by local state laws. While states like Connecticut and Florida recognize only C-Corporations as eligible, Massachusetts allows both the C and S corporations to avail of the credit.
- Next comes the deadline for filing the claim for a refund. Mostly, the local tax laws expect companies to file their R&D claims when they file their state taxes. However, some states like Maryland, New Hampshire, Virginia, Delaware, and Arkansas allow different deadlines as well.
- Other than the determination of the eligibility entity and the claim filing deadlines, the state offices also enact other conventions. Their regulations differ in the incentive calculation, the time required for processing the applications, and so on. Therefore, it is essential to check in with the local offices of the R&D to avoid any inconveniences at the time of filing.
- Moreover, the R&D credit percentages are not the same for all the local offices. Their percentages vary from eligible research to other factors such as contractual expenses and the involved personnel.
Preparations Every Company Needs to Make for Coping with the New R&D Policy
Many research companies use the R&D incentive to refund their tax liabilities. However, with the new changes finally coming into action, one may consider reviewing the following areas.
Managing the Cash Flow
Optimizing the cash flow is beneficial when the company has good revenue, small carryforwards but massive R&D costs. To optimize your company’s cash flow, you can check what regulations are beneficial for refunding state and federal loss carryforwards. Mostly, the federal loss forwards can refund about 80% of the incurred expenses.
For instance, Assembly Bill 85 refuses the availability of funds for companies having an income above 1million dollars. Therefore, Californian companies must keep in mind its impact.
Having the Optimal Accounting Methods
The accounting methods play an important role when you are trying to keep up with the additions made in the 6765 credits for increasing research activities.
Incorporated accounting methods should abide by the regulations listed in the Code of the R&D. Employing impermissible methods likely exposes the companies to strict audits and penalties. Therefore, the overall cash flow strategy must also indicate which accounting methods a company uses. Also, the included costs must fulfill the eligibility criteria of the credit.
Review the technical costs and many technical costs may be categorized as administrative costs.
Additional Considerations That May Prove Helpful
Analyze the current expenses classifying methods with your tax advisor. As for non-US companies, the final amounts must be according to the US pricing policies.
Moreover, when working with other companies, review the milestones and expected expenses for optimal tax strategy. Document every step in the research for an authentic claim.
Comprehending sections 174 and section 162 is extremely important as they provide the necessary guidelines on the expenses and possible effects of the amortization period on the overall tax income of the company.
Lastly, review the impacts of the rules listed in the 59(e) section concerning expenditures. As the sections apply differently to every category of expenses.
The R&D credit is an incentive that supports the research institutes to counterbalance their tax liabilities. However, recently in 2021-2022, TCJA changed its historic refundability. According to the present code, a company cannot refund the incurred expenses in the same year but amortize them for five years.
Numerous changes in the code may lead to confusion at some point. Therefore, collaborating with R&D specialists proves worthy.