The IRS’s Large Business & International (LB&I) Division has issued a Directive on the evidence needed to substantiate qualified research expenditures (QREs). The Directive allows examiners to accept as substantiation the ASC 730 Financial Statement R&D amount for the credit year with certain adjustments.
Adjusted ASC 730 Amount
The ASC 730 Financial Statement R&D amount is the research and development costs that are currently expensed on a taxpayer’s certified audited financial statement. Then, the Directive makes certain specified adjustments to the ASC 730 Financial Statement R&D amount.
Audited Financial Statements
The Directive only applies to LB&I taxpayers that use U.S. GAAP to prepare certified audited financial statements. The financial statements must show the amount of the currently expensed ASC 730 Financial Statement R&D as a separate line item on the income statement or in a separately stated note to the certified audited financial statements.
Directive Certification Requirements
Taxpayers wishing to take advantage of the Directive to determine its tax QRE’s must comply with the Directive’s certification requirements. A taxpayer is not required to attach the certification and computational schedules to its return. However, the statement and schedules must be completed in the event of an audit.
Moreover, a taxpayer may claim QRE’s in excess of its Adjusted ASC 730 Financial Statement R&D amount. However, the excess amounts do not receive protection under the Directive.
The Directive applies to original returns timely filed (including extensions) on or after September 11, 2017, for LB&I taxpayers who choose to follow the terms of the Directive.
Large Business and International Directive (LB&I-04-0917-005)
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