New R&D Tax Credit Submission Requirements for 2022

When filing for taxes for 2022, it is crucial to note that several changes to R&D tax credit submission requirements are going into effect this year. Since R&D submissions are highly susceptible to fraud, the IRS is creating more stringent filing requirements to avoid paying refunds for invalid and fraudulent claims. Being aware of these changes will help businesses avoid making errors when claiming R&D tax credits.

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1. Five changes are taking effect for amended claims beginning on January 10th, 2022. When making an amended claim, the following must be submitted to the IRS:

• All business components performing R&D activities for that year
• All research activities performed by business components
• A list of individuals who performed each research activity by business component
• The information everyone looked to discover by each business component
• Total qualified employee wage expenses, supply expenses, and contract research expenses (Can be done using Form 6765)

The tax code defines a business component as “a product, software, invention, technique, or formula” that will be sold, leased, licensed, or used by the business.

All of the above will need to be documented, and the company must sign a line on Form 1040x or 1120x declaring under penalty of perjury that all information submitted is accurate. If a company is unprepared to prove its claim, it may be denied its tax credits.

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2. New R&D tax credit submissions are currently exempt from additional documentation. If a business is filing for a tax return on time, it can continue to submit R&D claims with payroll documents, W-2s, receipts, invoices, etc.

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3. There is a one-year transition period extending through January 10^th, 2024, during which the IRS will provide a notice that business owners have 45 days to make corrections to a claim before IRS makes the final determination on the claim. After this transition period, the IRS can outright reject an amended return lacking additional documentation without notice.

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4. The Tax Cuts and Jobs Act of 2017 (TCJA) introduced a provision that requires R&D expenses to be amortized over five years. This provision eliminates the option to deduct the full amount in the year incurred starting on January 1st, 2022. The five-year amortization period may begin at the mid-point of the taxable year.

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5. The Inflation Reduction Act of 2022 (IRA) will double the maximum R&D tax credit from $250,000 to $500,000. However, since the R&D tax credit is calculated based on R&D spending, most startups will not be able to spend enough to claim this much credit.  On the other hand, startups with high R&D spending will be able to save more money.

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It can be difficult for a startup to keep up with all the new R&D tax credit submission requirements. MainStreet simplifies the tax filing process for your company by keeping up to date with constantly changing IRS regulations. Sign up with us today.