Exhibit D
Computation check sheet
Review steps for evaluating Research Credit computational issues
Review step |
Description |
Data source |
---|---|---|
Consistency rule. |
If a taxpayer claims a certain type of expense as a QRE in |
Form 6765, Section A (Fixed-Base Percentage); |
Substantiation. |
No change indicates that the taxpayer may not have considered the consistency requirement. A flat |
Base Year |
Aggregation rules. |
All corporations or trades or business under common control |
From 6765, Section A (Fixed-Base Percentage); |
Adjustments for |
The base amount (product of the fixed base percentage and the |
From 6765, Section A |
Invalid 280C(c)(3) |
Retroactive 280C(c)(3) elections are not allowed for research credit claims. |
Form 6765, |
Review steps for evaluating possible changes to taxable income and other tax items resulting from research credit claim
Review step | Description | Data source |
---|---|---|
General treatment of research and experimental expenditures. Establish whether the taxpayer also made all necessary adjustments to taxable income, deductions and other tax items as a result of the research credit claim. |
The research credit is an expense based credit. In order for the taxpayer to claim additional QREs for purposes of the research credit, the cost of the activity must first qualify as a research and experimental expenditure under section 174. For that reason, the taxpayer’s claim that it understated QREs most likely means that the taxpayer did not claim theses expenses as research and experimental expenditures in its original return. Determine if taxpayer’s reclassification of these expenses as section 174 expenses results in any change to taxable income, tax, or overpayment (refund) amount. The deduction under 174 for research and experimental expenses must be reduced by the amount of research credit. An annual irrevocable election is available to claim a reduced research credit and thereby avoid reducing the 174 expense deduction. See Section 280C for additional information. |
Form 1120-X and supporting work papers |
Capitalized R&E expenditures. Establish whether the additional QRE amount includes costs that were chargeable to a capital account. |
Generally, taxpayers elect to treat research and experimental expenditures as current expenses under section 174(a). . If the taxpayer claimed additional QREs that were improperly charged to assets contrary to the taxpayer’s accounting method of treating research and experimental expenditures as current expenses, then the taxpayer should make the necessary claim adjustments to net income and deductions for the additional research and experimental expenditures and corresponding adjustments to gains or losses on sale of assets, interest capitalization and depreciation. However, taxpayer’s change may be an unauthorized change in accounting method. See the IRC 174 Technical Advisor page for more information. | Form 1120-X and the supporting work papers for research credit claim; Form 1120, Line 26 Other Deductions |
Other Tax Items – Foreign Tax Credit limitation. Compare the QRE amount to the total amount of IRC 174 expenditures shown on Form 1118, Foreign Tax Credit, Schedule H. (The QRE amount should not be greater than the amount shown on Form 1118.) |
Given the fact that many code sections take into account IRC §174 expenditures in the computation of separate tax benefits and limitations, it is important that an examiner determine whether the taxpayer properly took into account any possible change to the amount and extent of R&E expenditures. A change in the amount of R&E expenditures may affect other tax items, including foreign tax credits, domestic manufacturing deduction, and cost sharing agreements. | Form 1120, Line 26 Other Deductions, Form 118, Schedule H |
IRC 280C.Verify that the taxpayer made an adjustment to taxable income (reduced its IRC 174 deduction) by the credit amount. | IRC §280C(c) (1) provides that when research credit is claimed at the regular rate, the amount of the IRC §174 deduction must be reduced by the amount of the credit. This and other changes in R&E deductions resulting from additional QREs may effect taxpayer’s AMT computation. | Form 6765, Section A and B (Credit Percentage) attached to and made a part of a timely filed original return |