How far back can you claim R&D Tax Credits?

Guidance on Claiming R&D Credits for Closed Tax Years 

This document provides a detailed methodology and interpretive guidance for taxpayers and CPAs on leveraging Revenue Ruling 82-49 to claim Research and Development (R&D) tax credits from closed tax years through a credit carryforward on Form 3800, General Business Credit. This analysis incorporates insights from Private Letter Ruling (PLR) 201548006 and the specific regulations governing the R&D credit under Internal Revenue Code (IRC) Section 41. 

Methodology for Claiming R&D Credits in Closed Tax Years 

The core principle allowing for the adjustment of credit carryforwards from closed years is that the IRS and the taxpayer can correct errors from a closed year to determine the correct tax liability for an  

open year. While the statute of limitations under section 6511(a) may prevent direct refunds for closed years, it does not bar the adjustment of a carryforward attribute to an open year. 

1. Foundational Precedent: Rev. Rul. 82-49 and PLR 201548006

• Revenue Ruling 82-49, 1982-1 C.B. 5: This ruling established that an investment credit did not have to be claimed on an income tax return for the year property was placed in service before it could be carried over to an open taxable year. This allows a taxpayer to carry forward an unused credit from a closed taxable year even if a timely claim for refund for that year has expired. 

• Private Letter Ruling 201548006: This ruling extended the logic of Rev. Rul. 82-49 to the Section 45B employer social security credit, which, like the R&D credit, is a component of the general business credit under Section 38. The PLR involved a taxpayer who had understated their allowable credits in closed years due to a computational error. The IRS ruled that the taxpayer could adjust the credit carryforward to an open year to reflect the corrected, higher credit amount that would have been available from the closed years. The ruling explicitly states that a general business credit originating from closed years can be adjusted to correct errors by both the Service and the Taxpayer. 

2. Application to Section 41 R&D Credits

The Section 41 credit for increasing research activities is a general business credit under Section 38, subject to the same carryforward rules under Section 39 as the credits discussed in the precedents above. Therefore, the same analysis applies. A taxpayer who failed to claim or under-claimed R&D credits in a now-closed tax year can recompute the credit for that closed year and carry forward any unused portion to an open tax year. 

3. Step-by-Step Process:

1. Identify Unclaimed or Understated R&D Credits: Review prior tax years, including those for which the statute of limitations has expired, to identify any qualified research expenses (QREs) that were not claimed. QREs generally include in-house research expenses (wages for qualified services and supplies) and a percentage of contract research expenses. 

2. Recalculate the R&D Credit for Closed Years: For each closed year with identified QREs, prepare a pro-forma Form 6765, Credit for Increasing Research Activities. This involves calculating the credit for that year as if it had been claimed correctly. 

3. Determine the Unused Credit: The recalculated credit must first be applied against the tax liability of the closed year. To the extent the additional credit would have reduced the tax liability in that closed year (including taking into account correlative changes like reduced deductions), the taxpayer is not entitled to a refund. The “unused” portion of the credit is the amount that exceeds the tax liability limitation for that year. 

4. Adjust the Credit Carryforward Schedule: The unused credit amount from the closed year is then added to the credit carryforward schedule. This adjusted carryforward amount can be utilized on Form 3800 in the first open tax year, subject to the normal tax liability limitations of that year. 

5. File with Supporting Documentation: When filing the tax return for the open year, attach a statement detailing the recalculation of the credit carryforward. This statement should explain the basis for the adjustment, citing Rev. Rul. 82-49 and the principles of PLR 201548006, and include the pro-forma Form 6765 for the closed year(s). 

Interpretive Guidance & Best Practices 

Best Practices for Taxpayers and CPAs: 

• Thorough Documentation is Key: While you are not amending the closed-year return, the IRS has the right under section 7602 to examine the correctness of the recomputed credit from the closed year. Therefore, it is essential to maintain robust documentation for the QREs of the closed year as if preparing for an audit of that year. 

• Pro-Forma Returns: Prepare a complete pro-forma amended return for the closed year to accurately determine the amount of credit that would have been used in that year and the resulting unused credit to be carried forward. 

• Disclosure Statement: A clear and comprehensive disclosure statement attached to the open-year tax return is critical. It should detail the years the credit originated from, the re-computation of the credit, how the unused portion was determined, and the legal basis for the carryforward. 

• Flow-Through Entities: PLR 201548006 specifically involved a taxpayer who was an owner of various flow-through entities (partnerships and S corporations). The ruling affirmed that this principle applies to credits generated by such entities and claimed by their owners. 

Tools and Fact Sheets for Training: 

• Training Checklist: Develop a checklist for reviewing prior-year R&D credit claims. This should include identifying common missed QREs, reviewing the statute of limitations for each year, and outlining the documentation required to support a re-computation. 

• Case Study Examples: Create case studies based on PLR 201548006 and Rev. Rul. 82-49 to illustrate the methodology. Show a hypothetical company that failed to claim credits in a closed year and walk through the calculation of the carryforward amount. 

• Flowchart: A visual flowchart can help explain the decision-making process, from identifying a potential missed credit in a closed year to applying the carryforward in an open year. 

Stipulations and Considerations for Form 6765: 

• Calculation Method: Rev. Rul. 82-49 and the related PLR do not dictate a specific method for calculating the underlying credit. The taxpayer should use the appropriate method that would have been applicable in the closed year. 

• Prohibition on Alternative Simplified Credit (ASC) Election: A significant stipulation exists. The Treasury Department and IRS prohibit taxpayers from electing the ASC method for a closed year to increase a credit carryforward. The specific regulation, Treas. Reg. § 1.41-9(b)(2), states that an ASC election can be made on an amended return “only if that tax year is not closed by the period of limitations on assessment.” 

• Rationale: The preamble to the final regulations (T.D. 9712) clarifies that allowing an ASC election for a closed year would have the practical effect of permitting an election on a return that can no longer be amended. 

• Implication: This means a taxpayer can correct a computational error for a credit claimed under the regular method, but cannot make a new, retroactive ASC election for a closed year to generate or increase a carryforward. 

In conclusion, the precedent set by Rev. Rul. 82-49 and affirmed by PLR 201548006 provides a powerful tool for taxpayers to capture the benefit of unclaimed or understated R&D credits from closed tax years. By carefully recomputing the credit, determining the unused portion, and documenting the adjustment, taxpayers can increase their general business credit carryforwards to be used in open tax years. Adherence to the principles outlined above, particularly regarding documentation and the explicit prohibition on retroactive ASC elections for closed years, is crucial for a successful claim.