Claiming R&D Tax Credits: Important Considerations
Benefits of Performing an R&D Credit Study
The Research & Development Tax Credit is a federal cash saving benefit enacted to promote U.S. job growth, innovation, and enhancements in all areas of business. The credit is a cash saving incentive eligible for both businesses large and small.
Its federal and state tax benefit value may range up to approximately 15.8% of each qualified dollar invested to offset income tax liability. The R&D credit is also often available and/or refundable in many state jurisdictions at similar percentage benefits. In addition, for eligible and recently form small businesses (e.g. less than $5M in gross receipts), up to $250,000 per year is eligible to offset your company's payroll taxes.
However, often many companies are hesitant to take advantage of the R&D credit to avoid a potential increased risk of IRS audit. For example, as published by the IRS, in 2013 (FY14), out of approximately two million corporate tax returns filed less than 0.01% (16,664 filings) filed claims for the R&D tax credit. This is a common misconception that still occurs today regarding R&D tax credit claims, and millions of companies are missing out on this valuable U.S. tax incentive. Taking a research credit on a timely filed return, including extension, does not itself automatically increase your audit risk. See 2013 IRS Tax Data Book; [2013] SOI Tax Stats - Corporation Research Credit; IRS Exam Statistics Summary.
However, when amending your prior year tax return(s) to claim the R&D tax credit, which was not reported on your original Form 1120 (corporate tax filing) or amended Form 1120X filed on or before the due date of the original Form 1120, (including extensions), you are required to notify the IRS directly and send your amended filing (after the original due date) to a specified IRS address (e.g. Ogden Service Center, Internal Revenue Service Center, 1973 North Rulon White Road Ogden, UT 84201)
Moreover, the claim for credit or refund shall indicate at the top "Refund-Research Credit" and include a copy of the Form 6765, Credit for Increasing Research Activities (if any) filed with the original return.
Although not specifically acknowledged by IRS publication, the requirement to send amended R&D tax credit claims to the listed IRS address and "Refund-Research Credit" notification stamp on your submitted copy may in all likelihood increase your chances of audit selection, especially if a cash refund is owed to you from the IRS. See Credit for Increasing Research Activities: New Filing Address and Guidance on Certain Claims for Credit or Refund, Notice 2002-44.
Generally, when a return is selected, it can be for a variety of reasons including random selection. However, if a tax return is selected for review by the IRS, agents generally will focus on the most material items included on a return. The research credit tends to be one of the most material and effective items used by taxpayers to lower effective tax rates.
AndreTaxCo's comprehensive studies thoroughly explore your company's qualifying research activities resulting in more complete and detailed documentation substantiation to mitigate IRS challenges. When encountering Tax Controversy with the IRS, AndreTaxCo has the experience, training, and proficiency to vigorously and effectively represent you.
In the case of an IRS and/or state taxing authority audit, AndreTax Co will ensure you are fully prepared and in the best position to defend your claim. AndreTaxCo's audit experience and in-depth knowledge of evolving R&D credit legislation, regulations, and case law authority will help your business develop cost / benefit based strategic documentation practices to defend against IRS and/or state taxing examination.
AndreTaxCo will assist you in collecting and organizing your documents, books, and records, including researching and documenting the necessary tax authority to defend the positions under exam. AndreTaxCo will aggressively present your case to the IRS Appeals Officer and zealously negotiate the most advantageous settlement terms possible.