The IRS has announced new requirements when submitting claims for Research & Development (R&D) tax credit refunds. This applies to companies that have not taken an R&D credit on a timely filed income tax return that is being amended to take advantage of these credits.

The R&D tax credit is a credit for expenditures, which are technological, and undertaken for the research and development of new or improved business components or products; the activities of which constitute elements of a process of experimentation. For example, craft beer brewers often produce new styles or flavors of beers, such as a new Imperial IPA (India Pale Ale) into their product line of existing IPA’s, and generally, there is significant R&D related to this process and ultimate final production. Expenditures related to this process (see more on this below) may qualify for the R&D tax credit. Oftentimes, companies do not realize the extent to which they may have benefited from taking these credits, even years after the tax returns were filed. What they do not realize, is they may be able to amend their prior year's income tax returns to take the credit and obtain a refund.

When an income tax return is amended, a detailed statement to the IRS describing the R&D activities will be needed. In this statement, a craft beer brewer might want to discuss the new beer style that is being introduced and how it is different from other styles that are already in production and being sold. Discussing the processes involved, such as utilizing a recirculating infusion mash versus a one or two-step decoction mash, and why one is more beneficial than the other, might be included in the explanation. Further, one would want to include a discussion on the different types of grain being used. Is one or two-row barley being used as a base malt and why? Don’t skip out on details. Finally, documenting the results of any R&D activities is extremely important in this process.  

Documenting and quantifying all qualified research expenses (QRE’s) is also necessary. 

These expenditures may include some, or all, of the following: 

  • WAGES - names and wages of individuals involved in the research  
  • SUPPLIES - provide a detailed list of supplies. This would include all grains, hops, yeast, and or any other supplies incurred as part of the process  
  • LEASED COMPUTERS – are you leasing computers to assist you? The cost to lease can be included. Keep in mind that depreciation expense on computers you own is not a qualified expense and not includable
  • CONTRACT RESEARCH EXPENSES – Contract costs with a third party to engage in R&D may be able to be included

You will be required to provide a declaration, signed under penalty of perjury, verifying the facts provided are accurate. In most cases, your signature on the amended return serves this function.

In terms of the statute of limitations, the IRS has stated that there are no statutory provisions specific to research and development claims, however, the general rule is that a taxpayer has three years from the filing of the original return, plus timely filed extensions.

If you are concerned that you may have missed an R&D credit for which you may have been entitled, or just want more information you can contact Chris Martin, CPA, or Scott Cost, CPA.

Chris Martin, CPA, CGMA, is a Member of the Firm in the Accounting and Auditing Practice at SobelCo. Chris has worked closely with mid-sized, privately-held businesses throughout his entire career. He adds value by assisting clients with their financial statement needs, providing strategic planning for their corporate and individual income taxes, and taking an active role in consulting on major financial and business decisions.  Chris devotes a significant amount of his time specifically in SobelCo’s food and beverage practice where he manages financial statement audits, reviews, compilations, and income taxes for manufacturers, distributors, and supermarket owners in the tri-state area.

Scott Cost, CPA is a Tax Manager at SobelCo.