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.). 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.
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 hunting||Finance and insurance|
|Mining||Real estate, rental, and leasing|
|Manufacturing||Professional, scientific, and technical services|
|Wholesale and retail trade||Management of companies (holding companies)|
|Transportation and warehousing||Administrative and support and waste management and remediation 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 manufacturing||Petroleum and coal products manufacturing|
|Beverage and tobacco product manufacturing||Chemical manufacturing|
|Textile mills and textile product mills||Plastics and rubber products manufacturing|
|Apparel manufacturing||Nonmetallic mineral product manufacturing|
|Leather and allied product manufacturing||Primary metal manufacturing|
|Wood product manufacturing||Fabricated metal product manufacturing|
|Paper manufacturing||Machinery manufacturing|
|Printing and related support activities||Computer and electronic product manufacturing|
|Electrical equipment, appliance, and component manufacturing||Furniture and related product manufacturing|
|Transportation equipment manufacturing||Miscellaneous 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.