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New Developments for the Research Tax Credit
The research tax credit remains a valuable incentive for businesses that conduct qualified research and development. In fiscal year 2010 alone, the federal credit rewarded companies with an estimated $5.6 billion of benefit for conducting R&D activities. Despite the benefits it provides to the business community at large, its well-deserved reputation for complexity and uncertainty for taxpayers continues, with a number of recent administrative, regulatory and judicial developments. Taxand US highlights some of the recent developments and discusses their potential implications for taxpayers.
IRS Administrative Developments
Continuing its effort to resolve some of the long-standing controversies between taxpayers and the IRS on research credit issues, the IRS hosted another discussion forum with tax practitioners in November 2011 in Washington. The stated purpose of these meetings is to better understand documents that taxpayers (and practitioners) rely on to document the research credit, as well as to discuss approaches the IRS could use to more effectively resolve audits. Numerous representatives from the Large Business & International Division, Counsel, Appeals and Treasury attended the meeting.
Taxand US analyses the issues highlighted in greater detail
Some things never change. The IRS and taxpayers continue to disagree on the appropriate standards for documenting activities and costs, and Congress once again has failed to renew the research credit prior to its expiration. What recent developments have shown is that taxpayers need to continue to review their approach and supporting documentation to ensure the sufficiency of the data gathering process.
Taxpayers should take away a couple of key messages. First, for higher-level executives (or any other individual likely to be challenged in an IRS exam, such as marketing folks or other direct support personnel), it is simply not enough to just get an estimate of time spent on qualifying activities. It is important to gather supporting information that demonstrates their role in research and how they impact the progress of the research activity. Second, it is important to note that the executives in this case did not have a technical background. The IRS may try to use this case as a basis for disallowing executives in general, so differentiating factors such as executives with recent patent applications or technical backgrounds are critical.
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