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If your business has claimed or intends to claim research and development (R&D) tax credits, here’s crucial news: The Internal Revenue Service (IRS) has extended the period to perfect R&D claims, giving you until January 10, 2025, to ensure your R&D tax credit claims align with the required criteria.

Understanding the R&D Tax Credit

The R&D tax credit encourages businesses, irrespective of size, to invest in developing or enhancing products, processes, techniques, formulas, or software. This federal credit typically ranges from 10% to 16% of eligible expenses, with 38 states offering additional credits for in-state spending.

Extension of the Transition Period

In October 2021, the IRS introduced new requirements for R&D tax credit refund claims, initially slated to take effect on January 10, 2022. These requirements outlined essential information for valid claims.

Last year, the IRS extended the transition period, allowing taxpayers 45 days to perfect a deficient R&D claim. Originally set to conclude on January 10, 2024, this period has been further extended to January 10, 2025, providing an additional year for perfecting R&D claims.

Criteria for a Valid R&D Tax Credit Claim

The IRS provides guidance on the criteria for a valid R&D tax credit claim:

• Identify all business components related to the Section 41 research credit claim for the year.
• For each business component, specify all performed research activities and name individuals involved, along with the information sought.
• Provide total qualified employee wage expenses, qualified supply expenses, and qualified contract research expenses for the claim year using Form 6765, Credit for Increasing Research Activities.

Reasons for the Extension

While the exact rationale behind the extension is unclear, potential factors include:

• Backlog of Returns: The IRS, grappling with a backlog of returns, aims to allocate resources to address this issue, allowing more time for claim reviews.
• Potential for Comprehensive Guidance: The IRS may be considering releasing additional guidance, requiring extra time to gather feedback from R&D claims.
• Data Gathering: The extension allows the IRS to continue collecting data, especially if the backlog persists, and evaluate whether to extend the perfection period further.

Next Steps

In addition to the extension, the IRS has updated its Frequently Asked Questions (FAQ) section, offering a sample submission. This sample provides clarity to taxpayers on presenting required information for an R&D credit claim, streamlining the process for those aiming to benefit from the R&D tax credit.