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Recent Judicial Interpretation Provides Guidance on the Research & Experimentation Tax Credit Consistency Provisions

Introduction

In calculating the Research and Experimentation Tax Credit (hereinafter “RTC”) under I.R.C. § 41 and its corresponding treasury regulations, the consistency rules are a critical concept to understand in order to properly measure and compute the RTC and achieve a sustainable tax return filing position per Circular 230. In order to properly measure and compute the increase in qualified research and experimentation expenditures between the two periods measured to calculate the RTC, the consistency rule holds that the same standard must be applied in both periods. This critical concept was the focal point of a recent pivotal judicial interpretation handed down back in July of 2014 by the Fifth Circuit Court in Trinity Industries, Inc. v. United States. Read more

House Votes To Reinstate The Research And Experimentation Tax Credit

On Friday, May 9th The U.S. House of Representatives voted 274-131 to reinstate the Research and Experimentation Tax Credit (hereinafter “RTC”) under § 41 of the Code which recently expired on December 31, 2013.

As a background, the RTC was first enacted in 1981 into the Code as a temporary provision at a time when research and development based jobs were alarmingly declining throughout the United States (hereinafter “U.S.”) due to U.S. based companies moving these jobs overseas. Lawmakers stated the lapse-and-revive cycle of the past 33 years has prevented companies from relying on it and thwarted its incentive effect. “Businesses can’t grow and invest when the tax code is riddled with instability and uncertainty,” Ways and Means Committee Chairman Dave Camp, a Michigan Republican, proclaimed on the House floor Read more

The Senate Finance Committee Agrees to Expand the Federal-Level Research & Experimentation Tax Credit for Certain Small Businesses

On April 3, 2014, The Senate Finance Committee agreed to expand the Federal-Level Research and Experimentation Tax Credit (hereinafter “RTC”) for certain small businesses, making the tax incentive available to companies that don’t have an income tax liability.

The change, pushed by Senator Chuck Schumer (D-N.Y.) and other lawmakers on the Hill, proposes to make the RTC available to many start-up companies that typically aren’t able to claim it during their first years in operation, as Senator Chuck Schumer indicated at the Finance Committee’s markup on expired tax incentives. Senators across both sides of aisles approved the proposal on a voice vote, with no objections.

Pursuant to the currently expired statute, companies can take the RTC only if they have Read more

Bipartisan Legislation Would Significantly Enhance the U.S. Research and Experimentation Tax Credit

U.S. Senator Chris Coons (D-Del.), leader of the Senate’s Manufacturing Jobs for America initiative, and Senator Pat Roberts (R-Kan.) introduced bipartisan legislation on January 14th to enhance incentives for private firms to invest in research and development within the United States and its possessions (e.g., Puerto Rico and Guam). The Innovators Job Creation Act would help startups and other small companies take full advantage of the Research and Experimentation Tax Credit (hereinafter “RTC”) pursuant to I.R.C. § 41 that are currently unavailable to them based upon the current statute.

“Research and development is the lifeblood of great American companies, turning ideas into innovations that grow businesses and create good manufacturing jobs here at home,” U.S. Senator Chris Coons (D-Del.) said. “If we want to strengthen our Read more

IRS Issues New Administrative Authority In Connection To Controlled Group Allocations Of The Research And Experimentation Tax Credit

IRS Building in WashingtonThe Internal Revenue Service (hereinafter “the Service”) has issued Notice 2013-20 in connection to the allocation of the Research and Experimentation Tax Credit (hereinafter “RTC”) to members of a controlled group. The guidance was in response to modifications made to I.R.C. § 41 as part of the American Taxpayer Relief Act of 2012 (hereinafter “ATRA”).

It should be duly recalled that the ATRA simplified the methodology for allocating the RTC to members of a controlled group of corporations and businesses under common control. Under the prior statute and corresponding treasury regulations, all companies under common control that were required to calculate the RTC at the group level were then required to allocate the RTC to the members of the group based upon each member’s standalone RTC. This allocation methodology was principally onerous when group members were required to use different methods for computing their standalone RTCs. The new law provides that the group RTC will now be allocated to the group members based on members’ proportionate share of Qualified Research Expenses (hereinafter “QREs”).

It should be duly noted that for tax years beginning after Dec. 31, 2011, Notice 2013-20 indicates that the treasury regulations dealing with the RTC allocations for controlled groups (e.g., Treas. Reg. §1.41-6(c) and related examples) no longer apply. In its place, taxpayers should allocate the RTC based on their proportionate share of QREs as outlined within the ATRA. Finally, the notice also indicates that the Service intends to modify Treas. Reg. § 1.41-6 to conform to the new allocation rules.

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