The research tax credit provides a significant incentive to engage in research activities. The credit has also generated quite a bit of controversy between the IRS and taxpayers.
The credit is not limited to taxpayers in the hi-tech or science industries. Taxpayers in just about any industry may qualify. This includes manufactures, consultants (such as engineers or architects), or companies with in-house computer staff.
The calculation for the credit is complicated. Wages, contract costs, supply costs, and certain computer rental costs can be included as qualified research expenses or QREs. The taxpayers gross receipts are also factored into the computation. The formula then compares these amounts for the current tax year to those for base years.
Generally, activities to design a product or process can qualify. Congress has added a number of requirements and limitations to try to clarify which design work qualifies. These requirements and limitations are frequently disputed by the IRS and the rules are constantly changing. The recent court cases are evidence of this. Here are a few examples:
- Hewlett-Packard Co. v. Commissioner: Gross Receipts from CFCs Excluded in Computing Research Tax Credit
- Trinity Industries, Inc. v. United States: Ship Designs Qualify for the Research Tax Credit
- TG Missouri Corp. v. Commissioner: Revisiting Supply Expenses for the Research Tax Credit
- Deere & Company v. Commissioner: Foreign Branch Income is Gross Receipts for Research Tax Credit
- Suder v. Commissioner: Research Was Not Routine, But Compensation Was Excessive
- Shami v. Commissioner: Wages for Research Were Not Reasonable
- FedEx Corporation v. United States: Taxpayer Can Pick & Choose Between Regulations
- Bayer v. United States: Government Limits on Disclosing Information from Research Tax Credit Audit
An experienced tax attorney can help. We advise clients as to research tax credit and refunds, audits, appeals, and litigation.