The Internal Revenue Service has issued guidance to Large Business & International (LB&I) Division examiners regarding the examination of the credit for increasing research activities under IRC Section 41 (“Research Credit”) claimed by LB&I taxpayers.
Independently determining the correct amount of Research Credit claimed by LB&I taxpayers can be resource intensive for those taxpayers and LB&I examiners. The directive is intended to provide an efficient approach for determining the amount of qualified research expenses (“QREs”) for LB&I taxpayers while, at the same time, reducing the burden of doing so on LB&I taxpayers and examiners.
LB&I taxpayers may choose to follow the terms of the directive on original returns timely filed (including extensions) on or after the date of the directive. At the beginning of an examination that includes the Research Credit, the audit team will verify whether the taxpayer followed or plans to follow the directive. For taxpayers choosing to follow the directive, the audit team will ensure the taxpayer complies with the eligibility requirements provided in the directive.
The directive instructs LB&I examiners to accept the Adjusted Accounting Standards Codification (ASC) 730 Financial Statement R&D for the credit year as the amount of QREs for that year. Adjusted ASC 730 Financial Statement R&D is made up of the research and development costs currently expensed on a taxpayer’s Certified Audited Financial Statement pursuant to ASC 730 for U.S. GAAP purposes and includes certain specified adjustments made to ASC 730 Financial Statement R&D.
The directive only applies to LB&I taxpayers (i.e. assets equal to or greater than $10 million) that follow U.S. 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 Certified Audited Financial Statements or show separately stated in a note to their Certified Audited Financial Statements.
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.