Employee separation payments do not qualify for research credit, IRS concludes

April 2013


The IRS has concluded, in Field Attorney Advice (FAA) 20131102F, that payments to certain salaried employees pursuant to a ‘voluntary separation program’ (VSP) do not constitute ‘wages’ eligible for the Section 41 research credit.

In the FAA, the IRS first took the position that the VSP payments were not Section 174 research and experimental (R&E) expenditures — one requirement for credit eligibility — but instead were ordinary and necessary business expenses under Section 162.  The IRS also asserted that even if the VSP payments qualified as Section 174 expenses, the payments were ineligible for inclusion in the Section 41 research credit computation because the taxpayer failed to establish a nexus between the expenses incurred and the years in which the terminated employees performed qualified services.

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