Incentives Update June 2018

Research and Development Credit:

Capturing the value in the era of tax reform

With tax reform now implemented and a good number of federal incentives either eliminated or reduced, most companies are not aware or have forgotten about capturing the value from the R&D credit. Here are a couple of items to remember on the R&D Credit for 2018.

  • Corporate rate down, R&D credit rate up: Since the corporate was reduced to 21%, most companies claiming the R&D credit under the “reduced” amount will get a bump in their R&D credit for 2018. For some companies, this could be a jump of the R&D credit of almost 40%.
  • AMT out, more R&D credit utilized: With corporate AMT being eliminated, more companies will have the opportunity to utilize the R&D credit, because it is not limited by AMT anymore.
  • Don’t forget software development and process improvements: Most of the time, CFO Services is helping clients identify the areas that qualify for the R&D credit. Two of the areas that we identify in addition to traditional R&D are software development and process improvements. In today’s economy, we are all building “technology” into our products and processes, which in turn drives innovation and builds efficiencies. These resources can qualify for the R&D credit, which in some cases is significant.


Iowa enacts legislation on the R&D credit, limiting the type of industries

In May, the state of Iowa enacted legislation (SF 2417), which among other things, adjusts the state’s R&D credit to only apply to businesses engaged in “manufacturing, life sciences, software engineering, or aviation and aerospace”. It also specifically excludes certain industries such as agricultural production and types of “contractors”. With Iowa having a large agricultural economy, clients should contact us to discuss if they fall within a certain industry for the R&D credit.


Multi-State Incentives Highlight:

At CFO Services, we are continually looking to help our clients with credits and incentives. All 50 States and many local communities have some sort of tax or financial incentive programs designed to stimulate investment, job growth and economic development. Credits & Incentives can make a big impact on site selection as well as the bottom line. Examples include Investment and/or Job tax credits, sales tax refunds, property tax abatements, training funds and infrastructure grants or even straight cash or land, just to name a few. Most programs have various thresholds to meet along with a compliance reporting period but the benefits are often significant.

CFO Services’ Multi-State practice identifies those opportunities through expert analysis of project-specific information derived from our survey process. The next phase of the process Identifies which incentives are the best fit through our comprehensive Research and concludes with Filing of the application including the negotiation, implementation and incentive compliance reporting.

In our next edition of the newsletter, we start highlighting a state’s incentives and items that we can help with along the way.


Technology Update:

Top 5 items you probably did not know about CFO Services and technology.

  • CFO Services can help you build workstreams for your SharePoint environment
  • We have a mobile app, that you can utilize for certain credits and incentive services
  • Our clients are provided technology with every engagement
  • CFO Services uses its own technology
  • Clients work with CFO Services for its consulting, technology or a combination of both


2018 Conference sponsorship and presentations:

CFO Services, is constantly out across the country reaching out to clients at conferences and events. In addition, we are speaking and helping to build knowledge through the tax community on credits, incentives, and technology. Check out some of the events in 2018, and don’t forget to stop by if you are at one of these events.

  • February 2018: NJ TEI Chapter Day
    • “Purchased State Credits: Too Good to be True & How not to lose them”
  • February 2018: Houston TEI Tax School
  • May 2018: Association of Computers and Taxation annual conference
    • “Cloud Computing and Maximizing Credits and Incentives”
  • June 2018: Southeast regional TEI conference (Hilton Head)
  • June 2018: West regional TEI conference (Phoenix)
  • More to follow in 2018

Incentives Update November 2017




IRS issues a directive to streamline R&D credit exams, which provides numerous benefits


Taxpayers and the IRS, during exam, have spent many hours going through issues and arguments related to Qualified Research Expenses (QREs) for the Research and Development Credit (R&D Credit). Recently the Large Business & International (LB&I) division of the IRS released guidance for large taxpayers to verify the QREs on the Form 6765 with detail of research and development expenses from its financial statement.

Basics of the guidance

In a memorandum dated Sept. 11, 2017, the LB&I division of the Internal Revenue Service (IRS) issued guidance to all LB& I employees regarding the examination of the credit for increasing research activities under tax code Section 41 claimed by LB& I taxpayers (the directive).

In the directive (LB&I-04-0917-005), a taxpayer with assets of at least $10 million who follow GAAP to prepare their certified audited financial statement can utilize this directive. The taxpayer must show a separate line item or show a separately stated note, the amount of currently expensed ASC 730 R&D. In addition, the taxpayer must attach a certification statement described in the directive.

The Adjusted ASC 730 is the amount currently expensed on a taxpayer’s certified audited financial statements pursuant to ASC 730 for U.S. Generally Accepted Accounting Principles (U.S. GAAP) purposes, with certain specified adjustments as required in the directive.
The directive applies only to original returns timely filed (including extensions) on or after Sept. 11, 2017, the date of the directive (publicly released Sept. 22) and only to LB& I taxpayers, i.e., those whose assets are equal to or greater than $10 million.
If the taxpayer satisfies these items above, the IRS examiners will not challenge the QREs that align with adjustment to the financial statement R&D. The whole intent of the directive is to reduce time during exam to reach a reasonable conclusion of what are QREs for taxpayers. However, any additional amounts of QREs claimed by the taxpayer on Form 6765 for the credit year over the Adjusted ASC 730 amount are subject to a risk assessment for an examination. In the end, even though the directive has a specific purpose, taxpayers need to evaluate their type of activities and level of effort needed to comply to with the directive.

Key Questions

Since its release, the directive has generated much interest, and along with the interest, many questions have arisen on the application of the directive. Below are some of the questions raised and assuming more will follow as it is applied.

  • What information will the IRS require to support QREs under this Directive?

The directive provides a list of items, but it is not intended to be an exhaustive list. Taxpayers will need to evaluate their facts to determine the best way to show the LB& I exam team how they arrived at their Adjusted ASC 730 amounts and related support that ties back to the ASC 730 reporting. Note that any Form 6765 QREs that are in excess of the Adjusted ASC 730 amount may be subject to the normal audit process.

To comply with the certification process of the directive, LB&I requires the taxpayer to retain documents from the tax year. The list of documents is as follows, but is not limited to these documents. A taxpayer’s facts will need to be considered to determine what other documents should be retained.


  • Certified Audited Financial Statement for the Credit Year including auditor’s certifying opinion;
  • Taxpayer’s Chart of Accounts;
  • List of U.S. ASC 730 Financial Statement Cost Centers that make up the ASC 730 Financial Statement R&D amount shown in Step 1 of Appendix C.
  • All ASC 730 R&D GL Accounts with account balance details that make up the ASC 730 Financial Statement R&D amount shown in Step 1 of Appendix C.
  • List of ASC 730 R&D GL Accounts with account balances that make up the adjustments in Steps 2 through 4 of Appendix C.
  • Taxpayer’s organization chart showing employees and levels of management for the Credit Year.
  • Executed contracts pursuant to which Taxpayer is performing ASC 730 research in order to comply with the terms of the contract.
  • Executed contracts pursuant to which persons other than employees of Taxpayer are performing ASC 730 research on behalf of Taxpayer. This would include sufficient information to show what research was performed outside the U.S.

List of employees with their respective W-2 Wage amounts claimed as additions to U.S. ASC 730 Financial Statement R&D in Step 4 of Appendix C, which list would also identify for the applicable taxable year each employee’s job title and reporting level and the cost center where each of those employees worked.

  • Can I eliminate “interviews” or “surveys” of engineering or research individuals during the R&D credit compliance process?

The intent of the directive is to streamline the exam process for the “typical” R&D, but an ancillary benefit is that taxpayers could eliminate some time and resources needed from engineering or research staff. In the R&D credit process, these individuals typically provide contemporaneous documentation and also provide allocations of their projects and/or activities. Now the directive will allow taxpayers to focus on the documents required for the directive and only other items claimed outside the directive, hence reducing the need to depend on those individuals.

  • Does the directive apply to certain industries?

This directive was drafted by LB& I in consultation with the technology industry, but it is not limited to any industry. This directive, is similar to a directive issued for the pharmaceutical industry for costs within certain drug phases. However, there are many industries performing qualified research that report little or no ASC 730 amounts in their financial statements. The directive will not benefit those companies.

  • How do you apply or elect this Directive?

The directive does not require a formal election or application. It only requires that Taxpayers satisfy the conditions in the directive. Taxpayers who satisfy the conditions of the directive may attach the completed disclosure statements at the time of filing of the Federal income tax return; alternatively, taxpayers may provide the completed disclosure statements at the outset of the examination.

General Requirements of the Directive

The directive provides examination guidance to LB& I agents, which means no other offices or divisions within the IRS are subject to the directive, namely, Appeals and Small Business and Self Employment (SBSE). Where a taxpayer appeals LB& I’s proposed assessment upon audit, it is uncertain how Appeals will respond to disputes over the application or interpretation of the directive.

In order to claim the benefits of the directive, LB& I taxpayers must:

  • Follow U.S. GAAP to prepare their Certified Audited Financial Statements, which show as a separate line item on the income statement OR show separately stated in a note the amount of the currently expensed ASC 730 Financial Statement R& D; and


  • Provide completed disclosure statements contained in Appendices A through D of the directive, including the Certification Statement in Appendix A.The directive does not require taxpayers to attach the completed disclosure statements at the time of filing of the Federal income tax return; instead taxpayers may provide the completed disclosure statements upon examination. The directive instructs the audit team to verify at the beginning of the examination of the research credit whether the taxpayer followed or plans to follow the directive.

Benefits of Utilizing the Directive

In reviewing the directive, there could be additional benefits to taxpayers in applying this directive. Here is an explanation on a few initially observed.

  • Increase financial certainty for a large portion of the R&D credit
    • In today’s FIN 48 and UTP environment taxpayers need to measure the risk associated with their R&D credit. This directive can significantly reduce the risk level associated with the R&D credit, which has a positive financial impact.
  • Minimize engineering and research employee involvement from the compliance of the R&D credit
    • Many taxpayers have to work significantly to communicate, educate, and capture information from the engineering and researching employees within their organization. The directive allows taxpayers to work around those individuals and require little if any of their time and energy towards the R&D credit.
  • Streamline the IRS exam towards the R&D credit
    • Taxpayers can settle a typically contentious issue rather quickly under this directive, and focus only on the items outside of the directive (contract research, e.g.). In addition, the directive has a “cap” like feeling to the application of the process.


In the end, taxpayers need to address the directive within their current framework of capturing the R&D credit. The challenge is that the application of the directive within exam will not occur for another two years, but it’s intent could be utilized today to streamline and improve the R&D credit process. During the upcoming tax compliance season, it would be prudent to analyze if the directive provide benefit to a taxpayer’s current R&D credit process.