Four Things You Need to Know About the IRS Directive for LB&I Taxpayers
On September 11, 2017, the Internal Revenue Service (IRS) issued a new directive for Large Business & International (LB&I) taxpayers. The purpose of the directive is to make determining the amounts of Qualified Research Expenses (QREs) when filing for the R&D Tax Credit more efficient while also reducing the burden on LB&I taxpayers and examiners in determining those amounts. The new directive for LB&I taxpayers provides a “safe harbor”.
1. Under what conditions can this directive apply?
There are two main conditions:
- The directive applies to LB&I taxpayers, namely taxpayer’s assets must amount to at least $10 million
- The LB&I taxpayer’s certified financial statements must be in accordance with the Adjusted Accounting Standards Codification (ASC) 730
2. How does this directive make the process more efficient?
The definitions for QREs outlined in section 41 of the IRS, which comprises the R&D Tax Credit, do not always match the definitions of financial accounts. In common practice, LB&I taxpayers often go through a time-consuming process where different employees need to be contacted in order to determine the QRE amounts. In contrast, the new directive for LB&I taxpayers allows taxpayers to determine the QREs already on the financials and then adjust those amounts. While the adjustment process is still rigorous, this would nevertheless reduce the burden of determining QRE amounts.
3. Are there limits to the directive?
Yes. For one, the directive can only be used for current year QREs. The directive does not apply to research conducted under contract and contractor costs. Applying the directive also requires reducing wage costs. Thus, the directive for LB&I taxpayers may not be advantageous for all.
4. Is this official law?
No. The IRS clearly outlines that the directive “is not an official pronouncement of law, and cannot be used, cited, or relied on as such. In addition, nothing in the directive should be construed as affecting the operation of any other provision of the Internal Revenue Code, Treasury regulations or guidance thereunder.”
Need more information?
With its expertise and experience in the R&D Tax credit, Swanson Reed can help you navigate the changes with the IRS’ new directive for LB&I taxpayers. To find out more, please contact a Swanson Reed R&D Specialist today.
Swanson Reed regularly hosts free webinars and provides free IRS CE credits as well as CPE credits for CPA’s. For more information please visit us at www.swansonreed.org/webinars or contact your usual Swanson Reed representative.
