The tax and business advisory firm WTP Advisors is predicting that Congress will renew the expired Research and Experimentation Tax Credit as it has traditionally done over the years.
Congress has extended the credit in one- or two-year increments over a dozen times since it was first authorized in 1981, WTP pointed out. The recent change of the calendar year marked the ninth time that the credit outright expired before legislation was passed to reauthorize the benefit. But officials at WTP Advisors say they are not concerned.
“The expiration of the federal research credit has become as routine as changing the tires on your car,” WTP Advisors Research Credit Services practice leader Jeff Malo said in a statement. “We typically get a new credit every other year or two, just as the tread on the expiring statute is going bald.”
WTP predicts that it is very likely that the federal research credit will be available for qualified research conducted in 2014, and taxpayers can plan now to secure those benefits by carefully documenting their 2014 qualified research activities.
“We would hate to see taxpayers lose the efficiency of implementing a forward-facing model for their 2014 federal research credit because they are waiting to see if Congress will pass legislation,” said Malo.
For three decades, the federal credit for increasing research activities has provided an extra incentive for businesses to take the risk of funding new products and technologies, WTP pointed out. If the federal credit is not renewed, analysts project a steep decline in new innovation and a spike in the number of companies who move their R&D operations overseas to take advantage of more lucrative tax incentives in other countries.
Congress failed to renew the federal research credit and the other expiring tax provisions collectively referred to as “tax extenders” before leaving for the 2013 year-end recess. But Malo believes it is likely that the federal research credit will be renewed retroactively in 2014.
“The last time the research credit expired was December 2011, and it wasn’t reauthorized until the Taxpayer Relief Act of 2012 was signed into law on Jan. 2, 2013, so companies conducting R&D in the U.S. have at least a full year before they should seriously question whether there will be a research credit for 2014 and beyond,” said Malo.
The expiration of the U.S. research credit will impose an administrative inconvenience on taxpayers that usually claim the credit, however. Public companies will not be allowed to accrue benefits for the expired legislation in their financial reporting, and they may have to recognize the benefits of a retroactive renewal in a later period. Fiscal year taxpayers who have to file a tax return before the credit is renewed may find that their tax year includes a period during which the credit was temporarily expired. When the credit is renewed, these companies may have to file amended tax returns to obtain the full benefit of the credit for their qualified research activities.
WTP Advisors is counseling its clients to continue gathering the data and documentation needed to claim the federal research credit.
“We are confident that the research credit will be renewed for 2014, and we don’t want Congressional inaction to stop clients from properly preparing their research credit claims,” said Malo.
WTP Advisors uses a forward-facing model for substantiating research credit claims, treating the credit as an exercise in real-time documentation of qualified research activities rather than a compliance exercise that attempts to document research activities that took place long ago.
The standard advanced by the IRS for substantiating research credit claims is “contemporaneous documentation.” That means documentation that is created in the ordinary course of conducting qualified research activities, and which is generated at or around the time the underlying research occurs.
Challenges emerge when taxpayers attempt to collect contemporaneous documentation of prior year activities for tax returns that will be filed in the current year. Organizations change as a result of a restructuring in the business, turnover in personnel, and upgrades to computer networks and systems.
“If you ask me what I did on this day last year, I can honestly tell you I have no idea, but if you ask me what I did last month, I can tell you with a high level of confidence where I was and what activities I was engaged in,” said Malo, “That is the benefit of documenting qualified research on a real-time basis. Real-time studies produce qualitatively better documentation that is more reliable, less invasive, and less costly to obtain.”