The IRS has released revised guidance for examiners in the Large Business and International Division (LB&I) reviewing amounts claimed by taxpayers as qualified research expenditures (QREs) for the Section 41 research tax credit. The directive, which revises a directive issued in 2017, provides an administrative solution for LB&I examiners to accept, as sufficient evidence of QREs, the adjusted ASC 730 financial statement R&D for the credit year, if the IRS determines that a taxpayer has satisfied all the requirements of the directive. The revised directive applies to LB&I taxpayers with assets equal to or greater than $10 million that follow US GAAP to prepare their certified audited financial statements.
As a result of the revised directive’s guidance and the Exam team’s/Territory Manager’s discretion to determine eligibility, taxpayers should evaluate whether spending the time and effort to meet the directive’s substantiation and documentation requirements is the most appropriate and efficient approach to compute QREs. Based on these factors and the resulting benefit, some taxpayers may conclude that other methodologies would be more advantageous.
Although the benefit of applying the directive likely has changed for many taxpayers, especially for software development activities, the directive may be an effective method for computing QREs for some taxpayers, based on their specific facts and circumstances.