New IRS Rules — We’ve Got Your Back!

On Friday, October 15, 2021, the IRS released a 22-page memo, Office of Chief Counsel Internal Revenue Service Memorandum Number 2021410F, explaining why the IRS has the authority to demand specific contemporaneous documentation in support of tax credit claims under section 41 of the Internal Revenue Code (IRC). The new memo cites a number of court cases and fundamentally underscores the approach we have always taken in supporting the claims of our clients. Not all practitioners in our field follow these guidelines, but we always have. If you are already a client, rest assured we have your back. If you are considering a new provider for your research credit documentation services, we would be very happy to work with you!

There is a four-part test to qualify for tax credit support:

1) Any expenses claimed must be incurred in support of an effort that qualifies as “research and development” rather than “routine engineering”. In other words, you must be trying to achieve an improved capability of some kind regarding your product, process or equipment development efforts.

2) The project must be related directly to your current business. For example, if you manufacture metal parts, you can’t claim the credit for branching out to paper products, in which you have no prior experience.

3) Each project must involve a demonstrable level of technological uncertainty. In other words, you had to evaluate a number of alternatives in an effort to achieve the envisioned advance. 

4) You must demonstrate that you undertook a process of experimentation in order to overcome the technological uncertainties.

Eligible activities include any efforts to create new or to develop improved products, processes, software programs, formulas or inventions, as long as they satisfy the 4-part test. 

The ‘short answers’ section of the Office of Chief Counsel Internal Revenue Service Memorandum Number 2021410F can be downloaded here.

You can read the entire 22-page Office of Chief Counsel Internal Revenue Service Memorandum Number 2021410F here.

We here at TCA are ready, willing and able to help you navigate the ever-changing rules and regulations. Our mission is to help keep engineering, manufacturing and software jobs here in the US and in Canada!

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Don't believe the myths - no business is too small to claim their portion of research and development tax credits. We can help you see if money is owed to you at no obligation to you. Schedule your complementary consultation today.

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