If your company performed qualifying research activities (QRAs) in prior tax years, you could claim credit for them. Many small businesses are unaware they qualify for R&D tax credits and can miss out on significant tax savings.
The R&D tax credit is a federal dollar-for-dollar tax credit designed to encourage innovation. In 1981, Congress created the R&D tax credit as an incentive to stimulate research and development in the private sector to counteract declining research investment in the 1970s.
When claiming the federal-level R&D tax credit, businesses can use tax returns for up to three previous tax years. To claim credit for prior tax years, companies must fill out Form 6765 (Credit for Increasing Research Activities) along with the individual income tax return (Form 1040). If an organization conducted QRAs in the past three years and documented its activity, it can retroactively file a claim in the current year. For example, if you filed a tax return on April 15th, 2021, for the 2020 tax year, you have until April 15th, 2024, to amend it.
Taxpayers filing amended tax returns after January 10th, 2022, must include information on several aspects of their QRAs, including:
- Business components to which the R&D credit relates for the tax year
- Identify all research performed for each business component
- List individuals that conducted research and information they were attempting to discover
- Provide total employee wages, qualified supplies, qualified computer rental expenses, and contract research expenses for the claim year on Form 6765
These new requirements reflect the IRS’ more stringent regulations, adopted as a response to an increasing number of fraudulent claims. The new IRS requirements emphasize the need for organizations to provide diligent documentation to improve their chances of successfully claiming R&D tax credits. Financial documentation must include employee wages and salaries, receipts for business expenditures, and contract research expenses. Further, tracking all research and development activities in your company can strengthen your claim by clarifying how each action is a QRA.
If you are claiming state-level R&D tax credits, you may be able to receive credit for activities going back further than the three-year limit for the federal-level credit. Furthermore, each state determines how many years businesses can carry forward unused state-level tax credits. If an organization is unable to claim all their credit in one tax year, they can carry it forward several years, with Texas topping the list at 20 years.
Tax season can be a hectic time for small businesses scrambling to gather the necessary documents. MainStreet handles the heavy lifting to claim your R&D tax credits, by matching you with each credit your organization qualifies for, saving time and money. Contact us to get started.