IRS releases taxpayer-favorable guidance on examination of research expenditures in pharmaceutical sector

Washington National Tax Services

In a long-awaited, taxpayer-favorable development, IRS Large Business and International (LB&I) Commissioner Heather Maloy on December 7 issued a memorandum to all LB&I employees regarding examination of section 41 research credit claims in the pharmaceutical sector.

The memo directs LB&I employees not to challenge the amount of qualified research expenditures (QREs) claimed by taxpayers in the pharmaceutical sector that arise during Stage 1 (discovery and preclinical stage) or Stage 2 (clinical trial stage) of the four-stage pharmaceutical development process, as long as the taxpayer provides a Certification Statement – described in the memo – regarding those QREs. The research undertaken in Stage 1 and Stage 2 often is referred to as "core R&D".

While the memorandum applies only to examinations of taxpayers in the pharmaceutical sector, the IRS is expected to use it as a model for examinations of core R&D in other industry sectors.

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