Research tax credit: Increased scrutiny follows credit permanence
TAX BLOG |
We’ve seen an increase in business interest in the research and development (R&D) tax credit since it was made permanent by the Protecting Americans from Tax Hikes Act of 2015. While the R&D credit has long been a valuable incentive, a surprising number of companies seemed to shy away from claiming it, perhaps because it was often in a cycle of expiration and extension.
Now that the research credit is here to stay, more business are confident that the effort to document and apply for the credit will pay off. And it should.
However, the IRS has been reviewing R&D claims and offering greater clarity on what they deem appropriate and inappropriate applications of the credit. If you are considering whether to apply for the credit, you should take note of some recent decisions that may indicate the IRS position on certain types of research expense.
These areas of additional focus include:
- Pilot model qualification
- Research conducted on computer software
- Prototype costs capitalized in construction in progress (CIP)
- Carryforwards from closed years
- Interplay between the R&D credit and the Domestic Production Activities Deduction
Even with these uncertainties, if your business is conducting research or development in excess of $500,000, it is typically more than worthwhile to conduct an R&D credit study. A well-researched study will identify which of your investment expenses should qualify for the credit—and minimize the risk of accidentally claiming credits that may later be rescinded. In our experience, the average benefit of a research tax credit study outweighs the cost by five to one.