Publication Date - June, 2005
NOTE: This guide is current through the publication date. Since changes may have occurred after the publication date that would affect the accuracy of this document, no guarantees are made concerning the technical accuracy after the publication date.
* Unless otherwise indicated, all section references are to the Internal Revenue Code of 1986, as amended, and the Treasury Regulations.
This Audit Techniques Guide (“ATG”) sets forth the Research Credit Technical Advisors’ suggested guidelines for auditing research credit issues. Examiners should consider adopting these guidelines, in whole or in part, when auditing the research credit. This audit plan is not an official pronouncement of the law or the Service's position and cannot be used, cited or relied upon as such.
The following issues are not addressed in this ATG:
- Amounts paid to certain research consortia. I.R.C. § 41(b)(3)(C).
- Payments to qualified organizations for basic research. I.R.C. § 41(e).
- The internal-use software exclusion. I.R.C. § 41(d)(4)(E).
- Research and experimental expenditures. I.R.C. § 174.
- International issues. Amounts paid or incurred for research impact many international tax issues, such as foreign tax credits, inter-company transactions, and the allocation and apportionment of expenses. You should coordinate your audit of research expenses with the International Examiner assigned to your case.
Please contact a Research Credit Technical Advisor if you need assistance with these issues.
Section 41 allows taxpayers a credit against tax for increasing research activities. Generally, the credit is an incremental credit equal to the sum of 20 percent of the excess (if any) of the taxpayer's qualified research expenses (“QREs”) for the taxable year over the base amount, and 20 percent of the taxpayer's basic research payments.
The research credit provisions originally appeared in section 44F of the Internal Revenue Code of 1954, as added to the 1954 Code by section 221 of the Economic Recovery Tax Act of 1981. Section 471(c) of the Tax Reform Act of 1984 redesignated section 44F as section 30. Section 231 of the Tax Reform Act of 1986 redesignated section 30 as section 41 and substantially modified the research credit provisions. Congress revised the computation of the research credit in the Revenue Reconciliation Act of 1989.
The research credit was not in effect for the period July 1, 1995 through June 30, 1996. The Small Business Job Protection Act of 1996, P.L. 104 188, reinstated the research credit for the period from July 1, 1996 through May 31, 1997 (i.e., 11 months); thereafter the research credit was extended to June 30, 1998 and June 30, 1999 1). Under the Tax Relief Extension Act of 1999, P.L. 106 170, the research credit was extended to June 30, 2004.2 The Working Families Tax Relief Act of 2004, P.L. 108-311, further extended the research credit to December 31, 2005.
Commerce Clearing House (“CCH”), the Bureau of National Affairs (“BNA”), and the Research Institute of America (“RIA”) have published helpful materials on the research credit. These materials are available on Westlaw and/or LEXIS. 2004 Stand. Fed. Tax. Rep. (CCH); Cohen, 556 T.M., Research and Development Expenditures; 2004 U.S. Tax. Rep. (RIA).
1 The Tax Relief Extension Act of 1999 requires that any research credit attributable to the period from July 1, 1999 through September 30, 2000, that is otherwise allowable under the Code, may not be taken into account before October 1, 2000. Likewise, any research credit attributable to the period from October 1, 2000 through September 30, 2001 may not be taken into account until October 1, 2001. For any return that covers a period overlapping one or both of the above suspension periods, the research credit is first calculated for the full tax year, and is then prorated by the number of months falling within the suspension period. Such portion must be deferred until after the end of that suspension period. The suspended amount of credit may be claimed by filing an amended return, an application for expedited refund, or an adjustment of estimated taxes. See Notice 2001-2; 2001-2 IRB 1 (December 6, 2000).
2 Notice 2001 2 provides guidance on computing and reporting the research credit that includes a research credit suspension period described in section 502(d)(2) of the Tax Relief Extension Act of 1999.