IRS Practice & Procedure: Research Credit

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Presentation transcript:

IRS Practice & Procedure: Research Credit HIGH TECH TX INSTITUTE: IRS PRAC&PRO- RESEARCH CREDIT 11/6/06 IRS Practice & Procedure: Research Credit SJSU-TEI High Tech Tax Institute November 6, 2006 Mallorie Jeong- Research Credit Technical Advisor

RC ATG and Examination Tools HIGH TECH TX INSTITUTE: IRS PRAC&PRO- RESEARCH CREDIT 11/6/06 RC ATG and Examination Tools Last update June 2005 Consistent case handling Save time Scope and materiality assessed more effectively

Aggregation / Allocation Temp.Reg. 1.41-6T HIGH TECH TX INSTITUTE: IRS PRAC&PRO- RESEARCH CREDIT 11/6/06 Aggregation / Allocation Temp.Reg. 1.41-6T Single TP computation Allocation of group credit among members Base on the relative amount of each individual member’s “stand-alone” entity credit No special allocation rule for consolidated groups Temporary regs released under TD 9205 in May 2005. Contains guidelines for the “allocation” of the credit for a controlled group of corporations. Applies a “single taxpayer” computation rule to members of a controlled group Control = 50% Start-up Stand-alone comp-Cannot allocation more than what the member would be entitle to if not a member of the group Consolidated group Designated member (makes elections on behalf of…) Disclosure of group activities on the return ??? and requesting supporting WPs FAQ can be secure on the RC website.

Guidance Priority Issue: Handling of intragroup transactions HIGH TECH TX INSTITUTE: IRS PRAC&PRO- RESEARCH CREDIT 11/6/06 Guidance Priority Issue: Handling of intragroup transactions Should receipts from controlled foreign corporations be excluded for the purpose of determining Gross Receipts? CCA 200620023 (2/14/06)– General Memorandum –exclusion NOT allowed. What type of receipts are included? ILM 200233011- GR exclusion was allowed.

RC Coordinated Issues: HIGH TECH TX INSTITUTE: IRS PRAC&PRO- RESEARCH CREDIT 11/6/06 RC Coordinated Issues: NEW (5/06)-Extraordinary utilities supply interpretation Overhead cost for self-constructed supplies are not QREs IU SW (3-prong test) Technical Writers’ wages are not qualified wages 401(k) benefits are not qualified wages 2 new issues which I mentioned earlier

LMSB Initiatives RC Methodology Prefiling Agreements CAP-Compliance Assurance Program Fast-track

HIGH TECH TX INSTITUTE: IRS PRAC&PRO- RESEARCH CREDIT 11/6/06 RC Claims Significant compliance challenge for IRS Re-emphasis on Notice 2002-44 Focus on due diligence in preparation of RC Study

Directive RE: Retroactive IRC 280C Elections Financial Services Industry Directive 7/26/04, reissued Aug 2005 References Notice 2002-44 Retroactive 280C election NOT allowed. Election MUST be made on an ORIGINAL return, otherwise, lower 13% rate is not available when claims or amended returns are filed. Protective election OK?

Mandatory MITRE Referral: HIGH TECH TX INSTITUTE: IRS PRAC&PRO- RESEARCH CREDIT 11/6/06 Mandatory MITRE Referral: IUSW cases with over $1.5M in research credit at issue per audit cycle Commercial SW cases… Critical to breakout QREs associated with IUSW to determine if a referral is required.

3 Main Compliance Categories COMPUTATIONS, IRC 41(c) QUANTIFICATION, IRC 41(b) QUALIFICATION, IRC 41(d)

HIGH TECH TX INSTITUTE: IRS PRAC&PRO- RESEARCH CREDIT 11/6/06 Computations Correct? QREs Proper? Activities Qualify?

ALL RC Examinations will address the following: HIGH TECH TX INSTITUTE: IRS PRAC&PRO- RESEARCH CREDIT 11/6/06 ALL RC Examinations will address the following: Procedural issues (e.g. claim filing procedures Notice 2002-44, proper elections) Computational issues Methodology assessments Record adequacy assessments Quantification issues Qualification issues

Qualified ACTIVITIES, IRC 41(d) Meets qualification criteria? Identify business component What is “qualified purpose?” Substantially all POE or shrink back Any excluded activities? Qualified research EXPENSE, IRC 41(b) Supplies Consumed ?? Not depreciable Contract research Service vs Purch goods Wages Directly engaging in Direct supervision Direct support

Recordkeeping Reg 1.6001-1 requires the keeping of records “sufficient to establish the amount of …credits,… required to be shown…” The consequence of failing to keep sufficient records substantiating a claimed credit may be denial of the credit.

Cross Industry General Issue Areas HIGH TECH TX INSTITUTE: IRS PRAC&PRO- RESEARCH CREDIT Cross Industry General Issue Areas 11/6/06 Admin., marketing & sales activities Manufacturing activities (e.g. prototypes) General IT maintenance activities Legal fees Technology acquired thru business acquisition Research conducted overseas Fringe benefits (e.g. 401(k), stock option exercise) Direct supervision / direct support Supplies (e.g.prototype materials, xtra utilities) Contract Services (e.g. cascading credit)

High Tech Mfgrs - Issues: HIGH TECH TX INSTITUTE: IRS PRAC&PRO- RESEARCH CREDIT 11/6/06 High Tech Mfgrs - Issues: Properly defining the R&D cycle vs. MFG Prototypes What activities are R&D? What costs incl? Process R&D Testing (Design v. Quality Control) Technical Marketing Supplies (e.g. mask tools, computers, prototype materials, xtra utilities) Quantification methods (e.g. dept/cost center allocations) Intragroup Gross Receipts from CFCs Aggregation & Allocation rules IRC 174 vs. 263(a)

Guidance paper for Commercial & Internal use Software, 2/4/05

Issue Coordination Software claimed as supplies Self-constructed assets (incl. equipment, tooling, prototypes), which may be “asset of a character…”

HIGH TECH TX INSTITUTE: IRS PRAC&PRO- RESEARCH CREDIT 11/6/06 ANY QUESTIONS ? Mallorie Jeong San Jose, CA 408-817-6163

HIGH TECH TX INSTITUTE: IRS PRAC&PRO- RESEARCH CREDIT 11/6/06 IRC Section 41 IRC Section Reg Section Original FR Reference 41(a)-General Rule 1.41-1, General TD 8251 5/17/89 41(b)-Qualified Research Expense 1.41-2, Qualified Research Expense 41(c)-Base Amount 1.41-3, incl. definition Gross Receipts TD 8930 1/3/01 41(d)-Qualified Activities 1.41-4, Qualified Research, Recordkeeping TD 9104 1/2/04, ANPRMM 12/26/03 (IUSW) 41(e)-Basic Research 1.41-5, Basic Research (12/31/86) 41(f)-Special Rules 1.41-6T, Aggregation of Expenditures TD 9205 5/24/05 (Agg & Alloc) 41(g)-Pass-thru of Credit 1.41-5A, Special Rules 41(h)-Termination 1.41-8T, Special Rules applicable after 1/3/01, AIRC election