You didn't generate an additional $1m in revenue in years 2-5. So in a situation where you get paid a $1m contract once, and pay $1m in salaries every year, here's what happens.
Year 2022: $1m revenue, -$1m expenses amortized to $200k: $800k profit, approximately 20% ($160k) is paid to tax.
Year 2023: -$1m expenses amortized to $200k, previous year's $200k: -$400k loss, carryforward. You cannot carryback 2023 losses to 2022 taxes.
The carryback is how Congress will resolve the issue for people who paid the tax.
The dispute is that you paid $160k in tax in year 1. Is that inefficient? In my opinion, it is. You paid $1m in salaries!
Yes. You could look at this as an indictment of the tax system, in that the plain language says what it says, but the IRS expects you to hire an account to make an "appropriate determination."
No small business accountant is incentivized to give you creative opinions, they're just going to go with whatever is the most popular practice. They don't give a fuck how much tax you actually pay.
The lack of specificity in your little table should illuminate for you why this is such a complex issue to comprehend. I understand there is some fictional, meaningless interpretation hidden inside your head where that table is "right," but for all normal interpretations, it's wrong.
> As the article suggests some are just filing incorrectly, what are the real risks and consequences of this?
Provided you never used an R&D tax credit, none.
But if you did, with a huge templated report report about software R&D, you have a verbatim provable record of doing R&D expenses. And those reports, they come from 10 different vendors who all use the same words and formatting. The IRS could easily solve one case and get everyone.
> Convincing the IRS that certain salaries suddenly don't qualify as R&D could prove challenging
I always felt the R&D tax credit was too good to be true. Like how could a templated, computer generated report from a vendor ever pass muster with the IRS?
Sure you could take the money, then you cease to exist later because you run out of money. And then there's no one to audit and no one to claw back from. But laws and enforcement changes. It's a crazy thing to gamble on.
The IRS could audit every single R&D tax credit company and find loads of skeletons in those closets. Being a customer of an automated R&D tax credit vendor is the only thing on the APB for those offenders.
Year 2022: $1m revenue, -$1m expenses amortized to $200k: $800k profit, approximately 20% ($160k) is paid to tax.
Year 2023: -$1m expenses amortized to $200k, previous year's $200k: -$400k loss, carryforward. You cannot carryback 2023 losses to 2022 taxes.
The carryback is how Congress will resolve the issue for people who paid the tax.
The dispute is that you paid $160k in tax in year 1. Is that inefficient? In my opinion, it is. You paid $1m in salaries!