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"Wins of Change" for R&D Tax Credit
The years 2009 and, quickly approaching, 2010 are likely to be viewed as momentous for the research and development tax credit. Many have argued that the R&D credit has numerous flaws that have limited its effectiveness. This edition of our US member A&M Taxand's weekly newsletter explores potential legislative changes to the credit as well as recent important judicial decisions. Overall, these are constructive for taxpayers.
It was initiated as an opportunity to reward companies for conducting research in the United States and to fend off an ever-increasing shift of high-paying jobs overseas. Many companies have had to weigh the credit's benefits against the burdens of implementing a process for capturing a credit that has never been permanent, is non-refundable and contains ambiguous statutory definitions. Furthermore, even after a company has created a detailed process to gather supporting documentation, there may be drawn out and potentially costly battles with the Internal Revenue Service over the ambiguous statutory definitions. Still, since 1981 Congress has continued to extend and enhance the R&D credit. The credit has broad bipartisan support in an era when Congress appears to have divergent positions on almost every other issue. As evidence, this year the relatively new Alternative Simplified Credit rate is increasing to 14 percent.
The President and Congress appear ready to, at a minimum, extend the R&D credit. However, until the statutory definition of "qualified research" is clarified by Congress, tax departments continue to seek certainty as to sustaining the amounts they have previously claimed. Furthermore, identifying research credit amended claims as a Tier 1 issue has put many taxpayers on the defensive in supporting their credit amounts.
On balance, 2009 offered taxpayers some good news. In recent decisions, the discovery test was repudiated, internal use software qualification tests were defined and the Cohan Doctrine was applied. Courts have sided with taxpayers in allowing both "reasonable" interpretations of guidance and "reasonable" methodologies for qualitative and quantitative documentation support. Going forward, these "wins of change" may offer taxpayers a more coherent path for sustaining R&D credits.
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