Recent global events have challenged many tax decision-makers to prioritize tax planning that can increase cash and enhance overall liquidity. The research credit often is overlooked as part of this process because of the misconception that the costs associated with review and analysis are too high to justify the reduction in taxes that can be achieved. Others who have not reviewed their research and development costs also might discover new opportunities to claim the credit based on changes in operations, overlooked qualified expenses, and changes in the law. A recent IRS safe harbor can help to reduce those costs, and a current review might uncover additional qualified expenses.
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Reduced costs under the safe harbor
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:
- Streamlined data gathering and cost analysis processes
- Reduced number of technical subject-matter expert meetings
- Reduced need for documentation collection to support qualified activities
- Greater certainty (such as safe harbor protection) under future IRS examination
- Potential reduction of reserves for R&D credit positions
The ASC 730 approach can identify qualifying R&D expenses under a less intrusive process with lower professional fees.
More comprehensive analysis
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.
Take action
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.
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