Unprecedented interest, new safe harbors and a rate increase to the ASC
After a year of monumental changes to the U.S. Tax Code, it’s now time to turn our focus on the future and examine whether the taxpayer victories of 2017 will continue.
As we enter 2018, we’re happy to report that the IRC Sec. 41 Research & Development Tax Credit has been preserved. Some issues still remain unresolved when it comes to qualification and quantification, but overall we believe the R&D credit will continue to be an important tool for helping U.S. businesses stay competitive in the global marketplace.
With that in mind, here are 3 R&D tax credit predictions for the next year:
- The 14% ASC Credit Rate will Increase Substantially
Currently, there are two primary credit calculation methodologies available to taxpayers looking to claim the R&D tax credit. The first is the ‘regular method’, which offers a 20% credit rate. The second is the Alternative Simplified Credit (ASC) method, which offers a 14% credit rate along with a simpler calculation process.
Due the complexities that come into play when using the regular method—especially when it comes to calculating the “base period” on which the credit is based—the IRS has long pushed for its elimination in order to ease administration burden. In recent years, one popular proposal for accomplishing this goal (without negatively impacting taxpayers) has been to simply increase the ASC rate to 20%, essentially eliminating the need for anyone to use the regular method.
Now, with a new administration in office and tax reform achieved, this proposal could finally become a reality. In fact, we predict that an increased ASC rate will find its way into the credit statute in 2018, with a possible linked provision eliminating the regular method of credit calculation altogether.
2. The IRS Will Expand the Allowance of Additional Safe Harbors
Issued on September 11, 2017, IRS Directive, LB&I Memorandum No: LB&I-04-0917-005, creates a new safe harbor whereby the IRS will accept as sufficient evidence of Qualified Research Expenses (“QRE”) the adjusted ASC 730 financial statement R&D expensed for the credit year.
The purpose for creating this safe harbor is to address the significant burden that taxpayers and the IRS face in determining the correct amount of R&D credits. The Directive is intended to relieve some Large Business & International (“LB&I”) audit resources that have historically been devoted to auditing this area, and to create an efficient manner for determining QRE for applicable taxpayers.
Obviously, the IRS recognizes that determining the correct amount of research credits imposes a significant burden on both the taxpayer submitting the claims and the IRS examiners auditing them. As such, we predict an expansion on not only this particular directive, but the overall use of safe harbors by the IRS in order to better manage their audit resources.
3. The Research Credit will See Unprecedented Levels of Taxpayer Interest
Though the R&D Credit was preserved under the new Tax Cuts and Jobs Act of 2017, many of the other common credits and deductions that businesses have relied on for decades were eliminated. As taxpayers and tax preparers alike work to understand the impact of this legislation, we predict that they will naturally find themselves looking toward the research credit as one of the primary tax planning strategies still available.
However, while the research credit is a great tax planning tool, it’s also considered one of the more complex areas of the tax code and common misinterpretations about qualifying activities and expenses, or under-supported credit claims, can still leave taxpayers susceptible under audit.
Thus, it’s highly advisable that any taxpayer looking to claim the credit for the first time consult with a research credit expert who can help them navigate through the complexities and work to ensure that their claims are properly substantiated.
So there you have it—my 3 R&D Tax Credit predictions for 2018. If and when these predictions come true, you can be sure that we’ll provide you with updated information right here on the R&D blog.
