IRS guidance on new Schedule M-3 line item for R&D costs

Washington National Tax Services

The IRS recently released guidance in the form of an answer to a frequently asked question (FAQ) raised by taxpayers and practitioners with respect to the new Schedule M-3 line item for research and development (R&D) costs. The IRS guidance discusses how the level of detail required to comply with the schedule depends on the method used in deducting R&D costs, i.e., as either current expenses or deferred expenses.

The Schedule M-3 instructions require taxpayers to attach a schedule supporting the amounts reported on the R&D costs line and specify that the schedule "must separately state and adequately disclose the transactions summarized" by that line (emphasis added). The instructions add that "the attached schedule may use a short description keyed to an expanded description in an additional attachment. The short description of the transaction should ... clearly identify (1) the account name under which the amount recorded in column (a) was recorded in the financial statements or books of the taxpayer, and (2) what adjustment is being recorded in either column (b) or column (c) for that transaction. The entire description is considered to be the tax description for the amount recorded in column (d) for that item."



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