Background
Effective January 10th, 2022, through the IRS’ Information Release 2021-203 and Chief Counsel Memorandum 20214101F, documentation requirements to claim the R&D credit became a bit more tedious. These requirements are only necessary on amended returns for refunds because of claiming the credit in tax years already filed. That is, for companies filing their returns tax year 2023 and onward, claiming the R&D credit on the initially-filed return, these requirements do not need to be met.
The New Rules
The guidance now requires that all R&D tax credit claims include the following documentation in an attached statement, filed with the amended tax return(s):
- Identify all the business components (i.e. R&D ‘projects’ per IRC 41) pertaining to the research credit claim for the applicable tax year being amended.
- For each business component, identify all research activities performed and name the individuals who performed each research activity, as well as the information that each individual sought to discover ● Individuals contributing qualified research expenses (QREs) claimed by the company filing for the credit include employees and 1099 contractors, if applicable.
Impact to Your R&D Claim
The only tangible impact to your company’s process during an R&D credit study with Leyton is committing an hour or two more of time in total. During this time our consultants will ensure these new requirements are met. This new requirement is not a big change for us. It has always been part of our process to provide similar documentation with this level of detail.
Examples of questions needing answers are as follows
- Specifically which business components or projects did each employee work on?
- The employee contributed towards R&D on which of the following levels: Supervisory, direct hands-on, or support level capacity?
- What is each employee’s job title?
- What were the actual R&D activities that each employee was taking part in? What sort of experimentation, what sort of information – knowingly or unknowingly – was each employee working to discover on behalf of the R&D taking place?
These sorts of questions are what defines R&D. They are also what our consultants already ask for the purposes of ensuring your company’s projects do qualify as R&D. The only change is a higher level of per-employee details. These details defining the actual day-to-day activities of employees that helped facilitate the R&D. With the information provided through a conversation, Leyton drafts the attached statement as thoroughly as possible. We do the leg work!
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