Audit Techniques Guide: Credit for Increasing …

1 Ike hare rintAudit Techniques Guide: Credit forIncreasing research activities ( research Tax Credit )IRC 41* - Table of ContentsPublication Date - June, 2005 NOTE: This guide is current through the publication date. Since changes may have occurred afterthe publication date that would affect the accuracy of this document, no guarantees are madeconcerning the technical accuracy after the publication date.* Unless other wise indicated, all section references are to the Internal Revenue Code of 1986, asamended, and the Treasury Audit Techniques Guide (ATG) is presented in several chapters. These chapters can beaccessed and then printed by following the links in the Table of Contents below. To print the entireATG please refer the the PDF of Contents1.

2 Introduction2. Determining the ScopeReview Form 6765 - Credit for Increasing research ActivitiesResearch Credit Claims (Not on an Original Income Tax Return)Prepackaged SubmissionsReview the Taxpayer's research Credit Computation WorkpapersPlan the Audit Strategy3. research Credit ComputationIn General The Alternative Incremental research Credit (AIRC)Start-Up Companies Gross Receipts Special Rules Aggregation Rules of Section 41(f)Short Years Acquisitions/Dispositions Partnership Issue 4. Qualified research Expenses (QREs) WagesSuppliesContract research Expenses 5. Qualified research ActivitiesIn General The Section 174 TestPage Last Reviewed or Updated: 2013-01-04 The Discovering Technological Information Test The Business Component Test The Process of Experimentation Test Shrink Back Exclusions6.

3 The Consistency Requirement7. Substantiation and Recordkeeping8. Sampling Methodologies 9. Reserved10. research Credit IssuesCoordinated IssuesAwareness IssuesDevelopment and Presentation of Issues11. Contact InformationTA Contact Informationike hare rintAudit Techniques Guide: Credit forIncreasing research activities ( research Tax Credit )IRC 41* - IntroductionPublication Date - June, 2005 NOTE: This guide is current through the publication date. Since changes may have occurred afterthe publication date that would affect the accuracy of this document, no guarantees are madeconcerning the technical accuracy after the publication date.* Unless otherwise indicated, all section references are to the Internal Revenue Code of 1986, asamended, and the Treasury of Contents | Chapter 21.

4 INTRODUCTIONThis Audit Techniques Guide ( ATG ) sets forth the research Credit Technical Advisors suggestedguidelines 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 pronouncementof the law or the Service's position and cannot be used, cited or relied upon as following issues are not addressed in this ATG:a) Amounts paid to certain research consortia. 41(b)(3)(C).b) Payments to qualified organizations for basic research . 41(e).c) The internal-use software exclusion. 41(d)(4)(E).d) research and experimental expenditures. ) 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 ofexpenses.

5 You should coordinate your Audit of research expenses with the International Examinerassigned to your contact a research Credit Technical Advisor if you need assistance with these 41 allows taxpayers a Credit against tax for Increasing research activities . Generally, thecredit is an incremental Credit equal to the sum of 20 percent of the excess (if any) of the taxpayer'squalified research expenses ( QREs ) for the taxable year over the base amount, and 20 percent ofthe taxpayer's basic research research Credit provisions originally appeared in section 44F of the Internal Revenue Code of1954, 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.

6 Section 231of the Tax Reform Act of 1986 redesignated section 30 as section 41 and substantially modified theresearch Credit provisions. Congress revised the computation of the research Credit in the RevenueReconciliation Act of Last Reviewed or Updated: 14-Aug-2012 The research Credit was not in effect for the period July 1, 1995 through June 30, 1996. The SmallBusiness Job Protection Act of 1996, 104 188, reinstated the research Credit for the period fromJuly 1, 1996 through May 31, 1997 ( , 11 months); thereafter the research Credit was extended toJune 30, 1998 and June 30, 1999 ). Under the Tax Relief Extension Act of 1999, 106 170, theresearch Credit was extended to June 30, 2004. The Working Families Tax Relief Act of 2004, 108-311, further extended the research Credit to December 31, Clearing House ( CCH ), the Bureau of National Affairs ( BNA ), and the ResearchInstitute of America ( RIA ) have published helpful materials on the research Credit .

7 These materialsare available on Westlaw and/or LEXIS. 2004 Stand. Fed. Tax. Rep. (CCH); Cohen, 556 , research and Development Expenditures; 2004 Tax. Rep. (RIA). The Tax Relief Extension Act of 1999 requires that any research Credit attributable to the periodfrom July 1, 1999 through September 30, 2000, that is otherwise allowable under the Code, may notbe taken into account before October 1, 2000. Likewise, any research Credit attributable to theperiod from October 1, 2000 through September 30, 2001 may not be taken into account untilOctober 1, 2001. For any return that covers a period overlapping one or both of the abovesuspension periods, the research Credit is first calculated for the full tax year, and is then proratedby the number of months falling within the suspension period.

8 Such portion must be deferred untilafter the end of that suspension period. The suspended amount of Credit may be claimed by filing anamended return, an application for expedited refund, or an adjustment of estimated taxes. SeeNotice 2001-2; 2001-2 IRB 1 (December 6, 2000). Notice 2001 2 provides guidance on computing and reporting the research Credit that includes aresearch Credit suspension period described in section 502(d)(2) of the Tax Relief Extension Act of Contents | Chapter 21212ike hare rintAudit Techniques Guide: Credit forIncreasing research activities ( research Tax Credit )IRC 41* - Determining the ScopePublication Date - June, 2005* Unless otherwise indicated, all section references are to the Internal Revenue Code of 1986, asamended, and the Treasury : This guide is current through the publication date.

9 Since changes may have occurred afterthe publication date that would affect the accuracy of this document, no guarantees are madeconcerning the technical accuracy after the publication 1 | Table of Contents | Chapter 32. DETERMINING THE SCOPEa. Review Form 6765 Credit for Increasing research ActivitiesTo claim the research Credit , a taxpayer must complete and attach Form 6765, Credit for IncreasingResearch activities , to its tax return. Form 6765 must be properly completed. If the taxpayer has notproperly completed Form 6765 in accordance with its instructions, the examiner should ask thetaxpayer to make the appropriate corrections and should obtain the relevant information beforeproceeding reviewing Form 6765, take note as to whether the taxpayer has elected the alternativeincremental Credit ( AIRC ) and/or whether the taxpayer has elected the reduced rate of Credit undersection 280C(c).

10 These elections must be properly made on a timely filed original return, withextensions and, where applicable, the taxpayer must continue to use such method unless properlyrevoked. Form 3800 should likewise be reviewed to verify the proper flow-through of the researchcredit to the section 38 General Business 6765 requires the taxpayer to allocate QREs among wages, supplies, and contract researchexpenses. A comparative analysis of the QREs with prior and subsequent years and a review ofthese expenses, in light of the taxpayer s business activity, are the initial steps in identifying areaswith the greatest potential for compliance research Credit Claims (Not on an Original Income Tax Return)An overpayment of tax for a taxable year generated, in whole or in part, by the research Credit andnot taken into account on a taxpayer's original income tax return may be taken into account by thetimely filing of an amended return ( , Form 1120X) with the appropriate Service Center or, whereapplicable, the timely filing of an application for an expedited refund ( , Form 1139).