Posted by Jeffrey M. Feingold on 09.26.17
Many taxpayers report GAAP ASC 730 research and development (R&D) costs on their certified audited financial statements. The IRS Large Business and International Division (LB&I) on September 11, 2017 signed guidance that will allow these taxpayers to take advantage of a ‘safe harbor’ under which an adjusted amount of their ASC 730 R&D costs can be determined as qualified research expenses (QRE) for the Section 41 credit for increasing research activities (research credit). If a taxpayer complies with the requirements of the Directive, the LB&I examiners are not to challenge certain QRE amounts for the credit year as set forth in the guidance.
To qualify for the safe harbor, an LB&I taxpayer (i.e., assets equal to or greater than $10 million) must report as a line item or as a footnote disclosure in its certified audited financial statements, the amount of R&D expense pursuant to ASC 730.
Applicable Eligible Qualified Expenses
Qualified Individual Contributors and 1st Level Supervisor Managers
Upper Level Managers
Computer rentals and leases
How to Apply
According to the Directive, taxpayers should attach the completed and signed Certification Statement Claiming Adjusted ASC 730 Financial Statement R&D as QREs (the Certification Statement, provided as Appendix A of the Directive) as well as Appendices B, C, and D of the Directive to their federal income tax returns to demonstrate their eligibility under the provisions of the Directive. Appendix B is the reconciliation of Form 6765 QREs to Adjusted ASC 730 Financial Statement R&D. Appendix C is the computation of Adjusted ASC 730 Financial Statement R&D. Appendix D is the wage detail for the taxpayer’s Adjusted ASC 730 Financial Statement R&D.
All taxpayers currently claiming research credits should perform a feasibility analysis to determine if the safe harbor would be beneficial as compared to their current approach for identifying QREs. Taxpayers seeking to use the safe harbor will have to establish the needed organizational reporting levels and structure of employees whose costs are expensed as ASC 730 Financial Statement R&D as well as identify the appropriate financial information to complete the required Appendices.
Companies that currently do not disclose ASC 730 Financial Statement R&D in their financial statements but that want to participate in the safe harbor going forward will have to identify, compute, and report those amounts so they can be presented in future audited financial statements. Finally, companies should assess and then compute their amounts of QREs likely to be generated from areas outside the safe harbor categories and create the appropriate documentation to substantiate this subset of QREs.
For more info of how this might affect your business, please contact Tax Point Advisors at 800-260-4138 or leave us a message below.