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IRS Aims to Better Determine Research Expenses

Oct 17th 2017
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The IRS has set a new guidance on research credit for Large Business & International Division taxpayers and examiners in order to create a more efficient procedure in determining the amount of qualified research expenses.

Guidance for Allowance of the Credit for Increasing Research Activities under I.R.C §41 for Taxpayers that Expense Research and Development Costs on their Financial Statements pursuant to ASC 730 is intended to increase the efficiency in determining qualified research credit under Internal Revenue Code Section 41.

Large Business & International taxpayers — those whose assets are equal to or greater than $10 million — can choose to follow the directive on original returns filed timely (including extensions) on or after the directive’s date. Auditors who begin an exam that includes the research credit will verify that the taxpayer followed or plans to follow the directive. For taxpayers who follow it, auditors will ensure their compliance with the eligibility requirements.

Here’s a snapshot of the directive’s requirements:

  • Large Business & International auditors must accept the Adjusted Accounting Standards Codification 730 Financial Statement R&D for the credit year as the amount of the qualified research expenses for that year.
  • Adjusted ASC 730 Financial Statement R&D is comprised of the research and development costs expenses on a taxpayer’s Certified Audited Financial Statement pursuant to ASC 730 for generally accepted accounting principles (GAAP) purposes and includes specified adjustments made to ASC 730 Financial Statement R&D.
  • The directive applies only to Large Business & International Taxpayers who follow GAAP to prepare their certified audited financial statements, which show as a separate line item on the income statement the amount of the currently expensed ASC 730 Financial Statement R&D included in their audited financial statements or show separately in a note to the statements.

The IRS makes clear that the directive “is not an official pronouncement of law, and cannot be used, cited, or relied on as such. In addition, nothing in the directive should be construed as affecting the operation of any other provision of the Internal Revenue Code, Treasury regulations or guidance thereunder.”

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