An Overview of the Recently Proposed Regulations for R&D Tax Credits

Research & Development plays a big role in a good number of industries today, most notably in the US. Recently, the government has come up with new regulations regarding the filing of R&D tax credit, which seeks to eliminate those ‘gray areas’ that have long confused business taxpayers in the past.

For one, a proposed ruling seeks to revamp the claiming of credit for expenditures which a company incurs which are related to the development of pilot models or any tangible property. It is to be noted that in the past, there was a lack of understanding regarding qualification for R&D tax incentives if the product developed by a company was subsequently sold in the market. It seems that products which were subsequently sold or distributed would not qualify for tax credit. But the new proposal brought forth by the IRS seeks to eliminate this gray area. This means that any expenditure incurred for the research and development of a product will still be able to qualify for tax credit, regardless if it is eventually sold in the market or used by the company as part of its business.

Another proposal involves the definition of a pilot model. A pilot model is referred to as any model or representation of a certain product which has been produced to resolve any uncertainty related to the product while it is being improved or developed. The pilot model would therefore include a representation that is fully-functional, or a component of the product. This brings us to another proposal involving the shrinking back provision. This provision is used when the Sec. 174 requirements have been met, but only for the component of a bigger product. This means that a company can redesign or refine the components of a product after it has already been produced. So even though the product already has a basic specification for its design, the expenditures of a company to eliminate any uncertainty with regards to the design of some of its components may qualify as credit.

These new proposed rules and regulations may be beneficial to plenty of firms in the country, particularly those which are dealing with food processing or manufacturing. But these regulations may only apply to tax years which end on or after the final regulations have been published or approved. But the IRS has also stated that business taxpayers can already depend on the above-mentioned proposals until such time that the final regulation has been released.

Here at Swanson Reed, we are proud to have more than 30 years experience in R&D tax incentives. If you would like to learn more about how your firm can benefit from R&D tax credit with regards to your research and experimentation activities, contact us.