Tax Incentives Blog

A new court opinion issued by the U.S. Tax Court emphasizes the importance of contract review for the analysis and substantiation of an R&D tax credit claim. The opinion alludes to additional requirements to demonstrate a taxpayer's economic risk when conducting research. Moreover, the court points to precedence to emphasize that terms and conditions within any contract agreement are most important, and no implications or assumptions should be needed or considered to substantiate a credit claim.

This week farmers, growers, or foresters in England will be able to apply for a portion of £8 million in cash grants for project costs that aim to drive the development and demonstration of solutions that have the potential to substantially improve overall productivity, profitability, and environmental sustainability and help the sector mitigate greenhouse gas emissions and adapt to the effects of climate change.

There’s still hope that the Tax Cuts and Jobs Act’s (TCJA) changes to Section 174, requiring amortization for research and experimental (R&E) expenses, could be delayed or repealed. Under the TCJA, as of January 1, 2022, domestic R&E expenditures are required to be amortized over 5 years and foreign R&E expenditures over 15 years. Prior to January 1, 2022 taxpayers had been able to write-off 100% of R&E costs.

The new definition of R&E expenditures under Section 174 also includes software development costs. Previously, under Revenue Procedure 2000-50, taxpayers had the option to immediately expense or amortize software development costs over a period of 36 or 60 months. With the TCJA change, these options are no longer available. Domestic software development costs must be amortized over 5 years and foreign software development must be amortized over 15 years.

As a continuing part of its initiative to further international collaborative research, Innovate UK has announced that it will invest up to £2 million in innovation projects in partnership with Korea Institute for Advancement of Technology (KIAT). The aim is to fund business-led industrial research that leads to a new product, industrial process or service, be innovative, involve a technological risk, and have high market potential in the participating countries.

Research & Development (R&D) Tax Relief Incentives in the UK have been in place for over 22 years, which is comparatively young against jurisdictions such as the US and Canada, which have had their R&D credits in place for over 40 years. In the most recent of years Her Majesty’s Revenue and Customs (HMRC), the UK’s administrating agency, has taken significant steps to improve the scrutiny of R&D tax relief claims made by Small and Medium-Sized Enterprises (SMEs) and Large Companies to ensure the uptake remains genuine.

As a part of its initiative to further international collaborative research, Innovate UK has announced that it will invest up to £3 million in innovation projects in partnership with Enterprise Singapore. The aim is to fund business-led industrial research. Proposals must include at least one small or medium-sized (SME) partner from the UK and one partner from Singapore. Large UK companies are allowed to apply but must involve at least one SME. These partners should be separate legal and non-linked entities to ensure genuine international collaboration. The UK partners will be awarded up to £350,000 from Innovate UK while Enterprise Singapore will fund the partners from Singapore.

For most tax return preparers, the end of the day on October 15^th marks a joyous occasion—the end of a frequently grueling tax filing season and a much-needed reprieve before the cycle begins again in January. Unfortunately, the Service cut the party short in the world of R&D tax credits with its issuance of a new memorandum. This memorandum, published by the Internal Revenue Service Office of Chief Counsel on October 15^th, issued new guidance regarding what required information a taxpayer must now include in its claim for an R&D tax credit.

It’s not too late to take advantage of Germany’s new research and development (R&D) tax credit. This credit was introduced in January 2020 and is worth up to EUR 1 million per tax year. The best part?  If the credit exceeds your tax liability, the excess is fully refundable. This means that the German government will refund all or a portion of the credit back to you in cash. The German authorities are giving taxpayers four years to file their R&D claims. So, even if you have already filed your 2020 tax return, or do not have time this year to get started on it, you can still benefit through 2024. It’s not too late, but don’t wait too long to file!

On February 11, 2021, the tax court issued a new memorandum opinion in Little Sandy Coal Company v. Commissioner. In this case, the taxpayer—a shipbuilding subsidiary—was denied its claimed R&D credit based on the development of 11 vessels by the IRS. After receiving its notice of deficiency, the taxpayer brought suit in the tax court seeking a redetermination. For the sake of expediency, the parties agreed to limit review to just 4 of the 11 projects at issue; the court’s opinion addressed only two of these—the Apex Tanker and Dry Dock Projects.

On January 11, 2021, the tax court issued a new opinion concerning the application of the Federal Credit For Increasing Research Activities. In Tangel v. Commissioner, the taxpayer—a designer and manufacturer of integrated controls and switchgears utilized in power generation—was denied its claimed R&D credit by the IRS. After receiving its notice of deficiency, the taxpayer brought suit in the tax court seeking a redetermination. For procedural reasons, the court limited its opinion and ruling to a single project performed under contract by the taxpayer. The Service argued that the research performed by the taxpayer under this third-party contract was “funded” as defined under section 41 of the code. Specifically, the government contended that under the contract, the taxpayer retained no substantial rights in the results of the research.