Ways to use IRS Statistics on the R&D Credit, December 2020

Subject:                 Ways to use IRS Statistics on the R&D Credit

Newsletter Date:   December, 2020


IRS Circular 230 Required Notice‐‐IRS regulations require that we inform you that to the extent this communication contains any statement regarding federal taxes, that statement was not written or intended to be used, and it cannot be used, by any person (i) for the purpose of avoiding federal tax penalties that may be imposed on that person, or (ii) to promote, market or recommend to another party any transaction or matter addressed herein.

IRS STATS TO CATEGORIZE R&D CREDIT METRICS:

When performing compliance on for the tax return, it is helpful and useful to have a reference point as to the reasonableness of certain deductions and credits.  With the R&D credit (Section 41), even more so, because it is one of the most highly visible credits to the IRS on tax returns.  One of the ways clients can determine if their R&D credit is reasonable is to use the statistics published by the IRS. 

Each year, the IRS release statistics across numerous areas of different tax returns (individual, flow-through, corporation, etc.)[1]. These can be organized by income levels, deduction types, and organized by the area of compliance.  Within this data the IRS provides statistics to corporations claiming the R&D credit. 

[1] IRS.GOV/Statistics

R&D Credit Statistics

The statistics tracked for the R&D credit only tracks C-corporation type entity information and does not include flow-through type entities (partnerships, S-corporations, etc.).  In addition, it is only current through 2014, but does breakout the base period methodology selected for the calculation.  Lastly, it does provide data as to the R&D credit attributes by industry.  The following table are the industries, as indicated on the tax returns, that are broken out in the currently available statistics. 

Table 1.1: Industries tracked for the R&D credit

Agriculture, forestry, fishing, and huntingFinance and insurance
MiningReal estate, rental, and leasing
ManufacturingProfessional, scientific, and technical services
Wholesale and retail tradeManagement of companies (holding companies)
Transportation and warehousingAdministrative and support and waste management and remediation services
InformationVarious services

In addition, since manufacturing is the largest industry claiming the R&D credit, it is further broken into subcategories to provide detailed visibility. 

Table 1.2:  Manufacturing sub-industries for the R&D credit

Food manufacturingPetroleum and coal products manufacturing
Beverage and tobacco product manufacturingChemical manufacturing
Textile mills and textile product millsPlastics and rubber products manufacturing
Apparel manufacturingNonmetallic mineral product manufacturing
Leather and allied product manufacturingPrimary metal manufacturing
Wood product manufacturingFabricated metal product manufacturing
Paper manufacturingMachinery manufacturing
Printing and related support activitiesComputer and electronic product manufacturing
Electrical equipment, appliance, and component manufacturingFurniture and related product manufacturing
Transportation equipment manufacturingMiscellaneous manufacturing

Utilizing this information

This information can be useful for clients to compare or understand how their R&D credit fits within their industry.  The R&D credit can be compared against the average credit for the industry or also the size of sales versus credit.  In addition, the statistics can provide visibility to compare the credit against other corporations using the similar base period method. 

CFO Services finds that these statistics provide a “ballpark” figure to compare against.  It is also important to remember that the IRS also use these statistics as a reference point when reviewing claims during exam.  These statistics should be used only as an informational guidepost, with the specific facts and circumstance of the company being the most important in determining the R&D credit.   

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