Presentation on theme: "IRS Practice & Procedure: Research Credit"— Presentation transcript:
1 IRS Practice & Procedure: Research Credit HIGH TECH TX INSTITUTE: IRS PRAC&PRO- RESEARCH CREDIT11/6/06IRS Practice & Procedure: Research CreditSJSU-TEI High Tech Tax InstituteNovember 6, 2006Mallorie Jeong-Research Credit Technical Advisor
2 RC ATG and Examination Tools HIGH TECH TX INSTITUTE: IRS PRAC&PRO- RESEARCH CREDIT11/6/06RC ATG and Examination ToolsLast update June 2005Consistent case handlingSave timeScope and materiality assessed more effectively
3 Aggregation / Allocation Temp.Reg. 1.41-6T HIGH TECH TX INSTITUTE: IRS PRAC&PRO- RESEARCH CREDIT11/6/06Aggregation / Allocation Temp.Reg TSingle TP computationAllocation of group credit among membersBase on the relative amount of each individual member’s “stand-alone” entity creditNo special allocation rule for consolidated groupsTemporary 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 groupControl = 50%Start-upStand-alone comp-Cannot allocation more than what the member would be entitle to if not a member of the groupConsolidated groupDesignated member (makes elections on behalf of…)Disclosure of group activities on the return ??? and requesting supporting WPsFAQ can be secure on the RC website.
4 Guidance Priority Issue: Handling of intragroup transactions HIGH TECH TX INSTITUTE: IRS PRAC&PRO- RESEARCH CREDIT11/6/06Guidance Priority Issue: Handling of intragroup transactionsShould receipts from controlled foreign corporations be excluded for the purpose of determining Gross Receipts?CCA (2/14/06)– General Memorandum –exclusion NOT allowed.What type of receipts are included?ILM GR exclusion was allowed.
5 RC Coordinated Issues: HIGH TECH TX INSTITUTE: IRS PRAC&PRO- RESEARCH CREDIT11/6/06RC Coordinated Issues:NEW (5/06)-Extraordinary utilities supply interpretationOverhead cost for self-constructed supplies are not QREsIU SW (3-prong test)Technical Writers’ wages are not qualified wages401(k) benefits are not qualified wages2 new issues which I mentioned earlier
7 HIGH TECH TX INSTITUTE: IRS PRAC&PRO- RESEARCH CREDIT 11/6/06RC ClaimsSignificant compliance challenge for IRSRe-emphasis on NoticeFocus on due diligence in preparation of RC Study
8 Directive RE: Retroactive IRC 280C Elections Financial Services Industry Directive 7/26/04, reissued Aug 2005References NoticeRetroactive 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?
9 Mandatory MITRE Referral: HIGH TECH TX INSTITUTE: IRS PRAC&PRO- RESEARCH CREDIT11/6/06Mandatory MITRE Referral:IUSW cases with over $1.5M in research credit at issue per audit cycleCommercial SW cases…Critical to breakout QREs associated with IUSW to determine if a referral is required.
11 HIGH TECH TX INSTITUTE: IRS PRAC&PRO- RESEARCH CREDIT 11/6/06ComputationsCorrect?QREsProper?ActivitiesQualify?
12 ALL RC Examinations will address the following: HIGH TECH TX INSTITUTE: IRS PRAC&PRO- RESEARCH CREDIT11/6/06ALL RC Examinations will address the following:Procedural issues (e.g. claim filing procedures Notice , proper elections)Computational issuesMethodology assessmentsRecord adequacy assessmentsQuantification issuesQualification issues
13 Qualified ACTIVITIES, IRC 41(d) Meets qualification criteria? Identify business componentWhat is “qualified purpose?”Substantially all POE or shrink backAny excluded activities?Qualified research EXPENSE, IRC 41(b)SuppliesConsumed ??Not depreciableContract researchService vs Purch goodsWagesDirectly engaging inDirect supervisionDirect support
14 RecordkeepingReg 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.
15 Cross Industry General Issue Areas HIGH TECH TX INSTITUTE: IRS PRAC&PRO- RESEARCH CREDITCross Industry General Issue Areas11/6/06Admin., marketing & sales activitiesManufacturing activities (e.g. prototypes)General IT maintenance activitiesLegal feesTechnology acquired thru business acquisitionResearch conducted overseasFringe benefits (e.g. 401(k), stock option exercise)Direct supervision / direct supportSupplies (e.g.prototype materials, xtra utilities)Contract Services (e.g. cascading credit)
16 High Tech Mfgrs - Issues: HIGH TECH TX INSTITUTE: IRS PRAC&PRO- RESEARCH CREDIT11/6/06High Tech Mfgrs - Issues:Properly defining the R&D cycle vs. MFGPrototypesWhat activities are R&D?What costs incl?Process R&DTesting (Design v. Quality Control)Technical MarketingSupplies (e.g. mask tools, computers, prototype materials, xtra utilities)Quantification methods (e.g. dept/cost center allocations)Intragroup Gross Receipts from CFCsAggregation & Allocation rulesIRC 174 vs. 263(a)
17 Guidance paper for Commercial & Internal use Software, 2/4/05
18 Issue CoordinationSoftware claimed as suppliesSelf-constructed assets (incl. equipment, tooling, prototypes), which may be “asset of a character…”
19 HIGH TECH TX INSTITUTE: IRS PRAC&PRO- RESEARCH CREDIT 11/6/06ANY QUESTIONS?Mallorie JeongSan Jose, CA
20 HIGH TECH TX INSTITUTE: IRS PRAC&PRO- RESEARCH CREDIT 11/6/06IRC Section 41IRC SectionReg SectionOriginal FR Reference41(a)-General Rule1.41-1, GeneralTD /17/8941(b)-Qualified Research Expense1.41-2, Qualified Research Expense41(c)-Base Amount1.41-3, incl. definition Gross ReceiptsTD /3/0141(d)-Qualified Activities1.41-4, Qualified Research, RecordkeepingTD /2/04, ANPRMM 12/26/03 (IUSW)41(e)-Basic Research1.41-5, Basic Research (12/31/86)41(f)-Special Rules1.41-6T, Aggregation of ExpendituresTD /24/05 (Agg & Alloc)41(g)-Pass-thru of Credit1.41-5A, Special Rules41(h)-Termination1.41-8T, Special Rules applicable after 1/3/01, AIRC election