New IRS Directive for Taxpayers Who Disclose GAAP ASC 730 R&D Costs on Audited Financial Statements

Substantiating a taxpayer’s research credit claim can often be burdensome for the taxpayer. A recent IRS directive may provide some relief and also mitigate risk during IRS exam. The new directive, announced by the IRS on September 11, 2017, provides guidance to Large Business & International (LB&I) IRS examiners on how to review the qualified research expenses (QREs) for LB&I taxpayers. The directive provides that LB&I auditors are not to contest certain QREs that are determined under the directive. This Directive only applies to LB&I taxpayers (total assets equal to or greater than $10 million) who separately state a line item or disclose a footnote for research and development (R&D) costs pursuant to ASC 730 on their Certified Audited Financial Statements.

Substantiating a taxpayer’s research credit claim can often be burdensome for the taxpayer. A recent IRS directive may provide some relief and also mitigate risk during IRS exam. The new directive, announced by the IRS on September 11, 2017, provides guidance to Large Business & International (LB&I) IRS examiners on how to review the qualified research expenses (QREs) for LB&I taxpayers. The directive provides that LB&I auditors are not to contest certain QREs that are determined under the directive. This Directive only applies to LB&I taxpayers (total assets equal to or greater than $10 million) who separately state a line item or disclose a footnote for research and development (R&D) costs pursuant to ASC 730 on their Certified Audited Financial Statements.

Internal Takeaway

The Directive presents an opportunity for taxpayers to mitigate IRS audit risks and reduce the administrative burden associated with their research credit claims. When evaluating this opportunity Company’s should consider their current treatment of R&D expense for financial reporting purposes, and how that treatment aligns with the directive. Taxpayers should evaluate R&D expenses pursuant to ASC 730 and how those compare to the Company’s QREs. This analysis may result in the identification of opportunities to expand the Company’s R&D tax credit. As the pursuit of this opportunity could impact the financial statement reporting, Taxpayers should be encouraged to start this evaluation without delay.

Procedures for Following the Directive

To follow the directive, taxpayers can voluntarily complete and attach a Certification Statement Claiming Adjusted ASC 730 Financial Statement R&D expenses as QREs (Appendix A) to their timely filed Federal income tax return. If the taxpayer elects to utilize this directive and completes Appendix A, the taxpayer must also include Appendices B, C, & D of the Directive to their Federal income tax return to validate their eligibility under the provisions of the Directive. These appendices aid in the reconciliation between QREs claimed on Form 6765 and QREs claimed on the taxpayer’s audited financial statements. The taxpayer is required to retain and make available upon request the underlying documentation that supports Appendices A, B, C, & D.

The directive discussed above: Guidance for Allowance of the Credit for Increasing Research Activities under I.R.C §41 for Taxpayers that Expense Research and Development Costs on their Financial Statements pursuant to ASC 730. LB&I Control No: LB&I-04-0917-055


Authors

Adam Quattlebaum, Senior Manager | DHG Tax
864.213.5368 | adam.quattlebaum@dhg.com

Liz McKnight, Senior Manager | DHG Tax
704.367.5904 | liz.mcknight@dhg.com