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:: Credit for Increasing Research Activites - Introduction
1.
INTRODUCTION
This Audit
Techniques Guide (“ATG”) sets
forth the Research Credit
Technical Advisors’ suggested
guidelines for auditing research
credit issues. Examiners should
consider adopting these
guidelines, in whole or in part,
when auditing the research
credit. This audit plan is not
an official pronouncement of the
law or the Service's position
and cannot be used, cited or
relied upon as such.
The following
issues are not addressed in this
ATG:
a) Amounts
paid to certain research
consortia. I.R.C. §
41(b)(3)(C).
b) Payments
to qualified organizations
for basic research. I.R.C.
§ 41(e).
c) The
internal-use software
exclusion. I.R.C. §
41(d)(4)(E).
d) Research
and experimental
expenditures. I.R.C. § 174.
e) International issues.
Amounts paid or incurred for
research impact many
international tax issues,
such as foreign tax credits,
inter-company transactions,
and the allocation and
apportionment of expenses.
You should coordinate your
audit of research expenses
with the International
Examiner assigned to your
case.
Please contact
a Research Credit Technical
Advisor if you need assistance
with these issues.
Section 41
allows taxpayers a credit
against tax for increasing
research activities. Generally,
the credit is an incremental
credit equal to the sum of 20
percent of the excess (if any)
of the taxpayer's qualified
research expenses (“QREs”) for
the taxable year over the base
amount, and 20 percent of the
taxpayer's basic research
payments.
The research
credit provisions originally
appeared in section 44F of the
Internal Revenue Code of 1954,
as added to the 1954 Code by
section 221 of the Economic
Recovery Tax Act of 1981.
Section 471(c) of the Tax Reform
Act of 1984 redesignated section
44F as section 30. Section 231
of the Tax Reform Act of 1986
redesignated section 30 as
section 41 and substantially
modified the research credit
provisions. Congress revised
the computation of the research
credit in the Revenue
Reconciliation Act of 1989.
The research
credit was not in effect for the
period July 1, 1995 through June
30, 1996. The Small Business
Job Protection Act of 1996, P.L.
104 188, reinstated the research
credit for the period from July
1, 1996 through May 31, 1997
(i.e., 11 months); thereafter
the research credit was extended
to June 30, 1998 and June 30,
1999 1).
Under the Tax Relief Extension
Act of 1999, P.L. 106 170, the
research credit was extended to
June 30, 2004.2
The Working Families Tax Relief
Act of 2004, P.L. 108-311,
further extended the research
credit to December 31, 2005.
Commerce
Clearing House (“CCH”), the
Bureau of National Affairs
(“BNA”), and the Research
Institute of America (“RIA”)
have published helpful materials
on the research credit. These
materials are available on
Westlaw and/or LEXIS. 2004
Stand. Fed. Tax. Rep. (CCH);
Cohen, 556 T.M., Research and
Development Expenditures; 2004
U.S. Tax. Rep. (RIA).
1
The Tax Relief Extension Act
of 1999 requires that any
research credit attributable to
the period from July 1, 1999
through September 30, 2000, that
is otherwise allowable under the
Code, may not be taken into
account before October 1, 2000.
Likewise, any research credit
attributable to the period from
October 1, 2000 through
September 30, 2001 may not be
taken into account until October
1, 2001. For any return that
covers a period overlapping one
or both of the above suspension
periods, the research credit is
first calculated for the full
tax year, and is then prorated
by the number of months falling
within the suspension period.
Such portion must be deferred
until after the end of that
suspension period. The
suspended amount of credit may
be claimed by filing an amended
return, an application for
expedited refund, or an
adjustment of estimated taxes.
See Notice 2001-2; 2001-2 IRB 1
(December 6, 2000).
2
Notice 2001 2 provides
guidance on computing and
reporting the research credit
that includes a research credit
suspension period described in
section 502(d)(2) of the Tax
Relief Extension Act of 1999.
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