Safe Harbor for R&D Costs on Audited Financial Statements

Determining the correct research and development costs (R&D) can be a complex process for both taxpayers and examiners. In an effort to ease the burden, the IRS issued Directive LB&I-04-0917-005 to all IRS Large Business and International (LB&I) employees, giving new guidance that aims to provide a more efficient means of approving Qualified Research Expenses (QREs).

On September 11, 2017, the IRS LB&I Division signed the Directive that essentially grants a ‘safe harbor’ to taxpayers if the taxpayer complies with the requirements provided by the Directive. This Directive only pertains to LB&I taxpayers (i.e., assets of at least $10 million) who follow U.S. GAAP and show their ASC 730 expenses on a separate line item in, or a footnote disclosure in, their certified audited financial statement.

IRS examiners are instructed not to dispute the adjusted QRE amounts for the credit year. Under the new safe harbor, an adjusted amount of ASC 730 R&D costs are accepted as sufficient evidence of QREs claimed for the Sec. 41 credit for increasing research activities on the tax returns. In addition, the Directive requires a certification statement and supporting schedules be attached to the taxpayer’s return.

To view the detailed guidance provided by the IRS, visit https://www.irs.gov/businesses/corporations/guidance-for-allowance-of-the-credit-for-increasing-research-activities-under-irc-ss41-for-taxpayers-that-expense-research-and-development-costs-on-their-financial-statements-pursuant-to-asc-730.

If you currently claim R&D credits and have audited financial statements, let us help your business meet the new Directive’s safe harbor and take advantage of the benefits related to supporting your qualified research expenses.

We are happy to guide you through this process if you’d like to take a more in-depth look at your business. Please contact me at jsheffield@bpw.com or (805) 963-7811.