A recent IRS safe harbor simplifies the process for taxpayers to substantiate eligible expenses by using determinations already made for financial statement purposes. For those that are eligible, using the safe harbor reduces professional fees and business interruption relative to a traditional comprehensive research and development study.
In 2017, the IRS Large Business and International (LB&I) division issued a directive providing taxpayers with an opportunity to capture their credit for increasing research activities (research credit) under IRC Section 41 by using Accounting Standards Codification (ASC) 730, “Research and Development,” financial statement research and development (R&D) costs to determine a portion of qualified research expenses.
By using the IRS LB&I ASC 730 safe harbor directive, taxpayers might gain these benefits:
The ASC 730 approach can identify qualifying R&D expenses under a less intrusive process with lower professional fees.
Many taxpayers rely on prior-year R&D studies to identify areas of the business with qualifying research expenses and to identify which costs are eligible for the credit. While a prior study can provide an understanding of the business and research expenses and law at the time the study was performed, an older study does not account for developments in the enterprise, its operations, and the law. As a result, taxpayers might not claim all of the research credits to which they are entitled. Therefore, taxpayers that have not performed a more comprehensive analysis on their R&D costs in the past few years should consider doing so now. Opportunities might exist to significantly increase the current or past year’s research credit claims. Performing a study now provides the opportunity to take a deeper look at the types of costs incurred, identify documentation to support claiming additional expenses, and prepare claims for a refund.
Regardless of a taxpayer’s goals, there are opportunities to increase its cash and liquidity by pursuing an alternative approach to claiming the research credit.