Generally speaking, a company’s statute of limitations to claim the research and development tax credit on an amended return is three years from the date of original filing. For example, a company that files their 2017 federal tax return on June , 2018 would have until June 6, 2021 to file an amendment to claim the R&D tax credit.
However, certain circumstances allow companies to claim the credit on a carryforward basis into an open tax year. This is due in part to Revenue Rule 82-49.
How Rev. Rule 82-49 Changed Business Credits
Rev. Rule 82-49 was originally applied to a corporation founded in 1976. This corporation placed several properties into service that qualified for the then investment tax credit. However, the corporation failed to claim this federal tax credit for the tax years 1976-1979. Further, the corporation would not have been able to utilize any of the credit in 1976 since they were in losses.
In the original analysis for Rev. Rule 82-49, the IRS determined that carryovers for companies in losses (or “NOLs”) and the investment credit operate in a similar manner. A company does not need to claim the investment credit on its original return for the year in which the property was placed into service.
This means that a company can claim a credit for a tax year beyond the traditional three-year statute of limitations and carry this credit forward into an open tax year.
Rev. Rule 82-49 Expands Eligibility to General Business Credits
It is important to note that although Rev. Rule 82-49 was originally intended for the investment credit, the IRS in Letter Ruling 201548006 stated that it is entirely reasonable to apply this ruling to the 3800 general business credits. In this ruling, the IRS cites Rev. Rule 82-49 stating:
[T]he failure to claim investment credit on qualified section 38 property placed in service in a taxable year for which the period of limitations for filing a claim for credit or refund has expired under section 6511 of the Code does not prevent a taxpayer from carrying forward any unused credit from the closed taxable year to an open taxable year. The investment credit and employer social security credit determined under section 45B(a) are current year business credits under section 38, and are both subject to the same section 39(a) carryforward rules.
In other words, the IRS concluded that a general business credit originating from closed years and being carried forward can be adjusted by both the taxpayer or the IRS. General business tax credits include the investment credit now under Sec. 46, the employer Social Security credit (Sec. 45B), and the R&D credit.
Further, in letter ruling 201548006 the IRS states that this ruling applies to corporations as well as passthrough entities. Companies of all types have used this powerful tool to claim credits when they were in losses for several years without challenge from the IRS.
Recomputation and Carryforward for Investment Credits
An example of how powerful the IRS ruling can be for a company can be seen in the figure below:
Following the ordinary statute of limitations, tax years 2016, 2017, and likely 2018, would not be eligible to claim an R&D benefit. However, by utilizing Rev. Rule 82-49 this company can claim the entire $170,220, plus the 2021 R&D credits for a total of $242,200 on their timely filed 2021 return.
It is important to note the amount of carryforward using Rev. Rule 82-49 can only be utilized for any credit that would have been unused in the originally claimed year, or for any closed years thereafter.
For example, a company fails to claim an R&D credit worth $100,000 in 2016, a now closed tax year. However the company had utilization for the credit in 2017, also a closed tax year, of $50,000. This means that the company can only carryforward $50,000 of the original $100,000 to be claimed in the open tax year of 2018. Nevertheless, recomputing missed tax credits is worth the time and expense, especially when it can mean the difference between a lean year or funds for capital improvements.
Did I Miss My Chance to Claim Business Tax Credits?
There may still be time to recoup unclaimed business credits.
By utilizing Rev. Rule 82-49, companies have the ability to claim either previously unused or unclaimed credits beyond the traditional three-year statute of limitations applied to most tax situations. Further, Letter Ruling 201548006 provided additional guidance to ensure that these rules apply to flowthrough entities and all general business credits a company may be able to claim.
If you feel that your company may qualify for this or any potential R&D tax credits please consult a Strike tax credit consultant that can help guide you through this process.