Last year at this time, I published my 3 R&D Tax Credit Predictions for the 2016 year. This included predictions relating to the issuance of final treasury regulations for internal use software development, an increase in IRS Scrutiny on R&D tax credit claims, and a no-change to the Alternative Simplified Credit Rate. So, how did I do?
1. The issuance of Final Treasury Regulations for Internal Use Software
As predicted, on October 4, 2016, Treasury published final regulations relating to internal use software (IUS) development. These regulations finalized proposed regulations issued in January 2015, and provided significant revisions and clarifications.
Based on the new favorable guidance outlined in the final regulations, taxpayers who were once limited by the additional scrutiny of the high threshold of innovation test will now have new opportunity to reconsider the credit. (Read here to learn more about these changes and the positive impact it now has on businesses development IUS software.)
2. An Increase in IRS Scrutiny
At the end of 2015, Congress surprised taxpayers with a permanent R&D tax credit, along with new provisions that broadened the credit’s applicability. As such, it would seem logical that the IRS would want to verify taxpayer compliance within these new areas. Hence, I predicted that we would see increased scrutiny in this area. Yet, as it turns out, the 2016 audit landscape appears to have been pretty consistent with 2015.
So did I miss the mark here?
It’s actually far too soon to assume that this prediction was wrong. Because the effective dates of the new payroll tax offset provision, alternative minimum tax (AMT) offset provision, and the new internal use software (IUS) regulation changes are January 1, 2016, taxpayers have not yet had the opportunity to file their claims.
As we enter 2017, and taxpayers begin to file their 2016 claims, we will begin to glean the IRS interest in this tax matter. Hence, I stand by my 2016 prediction that in the months to come, we will likely see increased scrutiny in this area.
3. The 14% ASC Credit rate will Remain the Same
Though we had some talk in 2015 regarding the elimination of the general calculation methodology along with an increase to the 14% Alternative Minimum Credit (ASC) rate, I predicted that we would see no change in this area, a prediction that turned out to be true. As noted last year, we should look for this to happen in 2017 as part of a larger tax reform initiative.
Be sure to check back in on the R&D blog next week, where I’ll reveal my 3 R&D Tax Credit Predictions for the 2017 year.
