Interpreting the LB&I Directive on ASC 730 Safe Harbor for R&D credits

Transcription

1 Interpreting the LB&I Directive on ASC 730 Safe Harbor for R&D credits Please disable pop-up blocking software before viewing this webcast November 29, :00pm 4:30pm ET 1.5 CPE Credits

2 CPE Reminders To receive CPE, you must be active for the entire webcast and respond to at least 75% of the polls. You will have 90 seconds to answer each poll. CPE is not offered for audio-only attendees or replay viewing Group participation will not receive CPE. You must be logged in individually to receive CPE credit Upon conclusion of the program, please complete the final evaluation and your CPE certificate will be available if you have met the minimum CPE requirements. Turn off all popup blockers to download your CPE certificate Use Q&A to ask questions during the webcast Grant Thornton LLP. All rights reserved. 2

3 For a better webcast experience Use a wired internet connection from your local office and turn off your computer's Wi-Fi signal For optimal viewing speed, close all other applications, including Outlook Most technical issues (e.g., buffering, silenced audio) can be resolved by refreshing your feed using the F5 key Use the Help button if you have technical difficulties. You can also call or contact GTWebcast@Level3.com Click the Resources button to download the presentation materials Grant Thornton LLP. All rights reserved. 3

4 Speakers Mark Andrus R&D Credit National Leader Strategic Federal Tax Services Dan Mennel West Region Leader Strategic Federal Tax Services Lauren Mitchell Manager Strategic Federal Tax Services Grant Thornton LLP. All rights reserved. 4

5 Learning objectives 1 Define the LB&I ASC 730 safe harbor for R&D Credit QREs 2 Identify QREs that fall outside the safe harbor 3 Assess risks and opportunities related to the directive Grant Thornton LLP. All rights reserved. 5

6 Agenda 1 Overview of the directive 2 Qualifying expenditures and exclusions 3 Documentation requirements 4 Applying the directive 5 Observations Grant Thornton LLP. All rights reserved. 6

7 Agenda 1 Overview of the directive Grant Thornton LLP. All rights reserved. 7

8 Directive overview Background 1 Provides guidance to LB&I examiners regarding R&D credit QREs 2 3 Stated objective is to provide an efficient manner for determining QREs and more efficiently manage LB&I resources Accept the "Adjusted ASC 730 Financial Statement R&D" as sufficient evidence of QREs 4 Several requirements and adjustments to arrive at "Adjusted ASC 730 Financial Statement R&D" Grant Thornton LLP. All rights reserved. 8

9 Directive overview Scope 1 Applies only to LB&I taxpayers (assets = or > $10mm) 2 Applies only to original returns timely filed (including extensions) on or after the Sept 11, Taxpayer must follow U.S. GAAP to prepare Certified Financial Statements 4 Taxpayer must show as a separate line item or as a note in the Certified Financial Statements the amount of currently expensed ASC 730 R&D Grant Thornton LLP. All rights reserved. 9

10 Directive overview Benefit 1 LB&I examiners will not challenge QREs which are the "Adjusted ASC 730 Financial Statement R&D" costs 2 Provides a list of specific documents that will be a starting point to document these safe harbor costs 3 Allows for additional, non-safe harbor costs to be included in the credit but subject to current risk-based exam procedures Grant Thornton LLP. All rights reserved. 10

11 Directive overview How did we get here? Silicon Valley group Grant Thornton LLP. All rights reserved. 11

12 Agenda 2 Qualifying expenditures and exclusions Grant Thornton LLP. All rights reserved. 12

13 Qualifying expenditures Charged to an ASC 730 cost center Wages Supply Other Qualified individual contributors 1st level supervisor managers Upper level managers Materials from inventory or aquired specifically for R&D Prototypes Some software and computer usage costs Grant Thornton LLP. All rights reserved. 13

14 Qualifying expenditures Employee definitions Qualified individual contributor Employee with no direct reports Assigned to ASC 730 cost center Safe harbor = 95% of wages 1 st level supervisor manager Managers who directly manages only qualified Individual Contributors Assigned to ASC 730 cost center Safe harbor = 95% of wages Upper-level management Managers who directly supervise any employee(s) other than qualified Individual Contributors Assigned to ASC 730 cost center Safe harbor = lesser of: (1) 10% eligible wages for qualified Individual Contributors and 1 st Level Supervisor Manager or (2) 100% of wages paid to Upper-level management Grant Thornton LLP. All rights reserved. 14

15 Excluded expenditures Required adjustments to ASC 730 amount Contract research performed by, and on behalf of, the taxpayer Amounts specifically excluded from IRC 174 Costs for R&D performed outside of the U.S. Subtractions Pilot model costs Amounts related to foreign entities Patent costs Qualified wages in excess of the safe harbor limits Certain GL accounts (e.g., depreciation, rent, training, etc.) Grant Thornton LLP. All rights reserved. 15

16 Excluded expenditures Examples of additional QREs outside of Safe Harbor Direct supervision costs if opted out of Upper Level Managers safe harbor limit Qualified costs for research performed in connection with a contract Additional Pilot model costs Certain non-asc 730 software development costs Certain non-asc 730 product or process improvement related R&D Grant Thornton LLP. All rights reserved. 16

17 Agenda 3 Documentation requirements Grant Thornton LLP. All rights reserved. 17

18 Documentation Directive appendices 1 Appendix A Certification Statement Claiming Adjusted ASC 730 Financial Statement R&D as QREs 2 Appendix B Reconciliation of Form 6765 QREs to Adjusted ASC 730 Financial Statement R&D 3 Appendix C Computation of Adjusted ASC 730 Financial Statement R&D 4 Appendix D Adjusted ASC 730 Financial Statement Wage Detail Either file with return or provide to Exam upon request Grant Thornton LLP. All rights reserved. 18

19 Documentation Taxpayer documents List of Taxpayer's chart of accounts All ASC 730 R&D GL accounts and account balance detail that make up the ASC 730 R&D amount and adjustments in Steps 2 through 4 of Appendix C Organization chart showing employees and levels of management List of ASC 730 Financial Statement cost centers included in the ASC 730 R&D amount Credit year audited financial statements with auditor's certifying opinion Executed contracts under which Taxpayer is performing ASC 730 research to comply with the terms of the contract Executed contracts under which persons other then employees of Taxpayer are performing ASC 730 research on behalf of Taxpayer List of employees with respective W-2 wage amounts claimed as additions to ASC 730 R&D amount Grant Thornton LLP. All rights reserved. 19

20 Documentation Be prepared Directive states that documentation is not limited to that provided in the included list CAUTION Uncertain how LB&I will apply the directive with respect to requesting documentation Non-safe harbor QREs are subject to current documentation "standard operating procedures" Uncertain whether states will require taxpayers to follow current documentation "standard operating procedures" for safe harbor QREs Grant Thornton LLP. All rights reserved. 20

21 Agenda 4 Applying the directive Grant Thornton LLP. All rights reserved. 21

22 Applying the directive Computing adjusted ASC 730 financial statement R&D Step 1 Step 2 Step 3 Step 4 Step 5 ASC 730 R&D: Start with ASC 730 Financial Statement R&D U.S. ASC 730 R&D: Subtract from ASC 730 Financial Statement R&D all amounts related to foreign entities to arrive at U.S. ASC 730 R&D U.S. ASC 730 R&D: Subtractions Costs excluded from Sec. 174 Non-wage, non-supply, and non-contract research costs Contract research performed by or on behalf of taxpayer In-House research performed outside of U.S. Prototype overhead, patent costs, serverance pay U.S. ASC 730 R&D: Employee Wage Adjustment Subtract: Wages and stock-based compensation not already subtracted in Step 3 Addback: 95% Wages for Qualified Individual Contributors, 95% Wages 1st level Supervisor Managers; Upper Level Manager Limit Adjusted ASC 730 R&D: Form 6765 Inputs Wage QRE: Report amount from Step 4 on Form 6765 Line 5 or 24 Supplies QRE: Report costs of supplies remaining after Step 3 on Form 6765 Line 6 or 25 Lease or Cost of Computer QRE: Report rental or lease costs of computers remaining after Step 3 on Form 6765 Line 7 or 26 Grant Thornton LLP. All rights reserved. 22

23 Application example Basic computation (cont.) Grant Thornton LLP. All rights reserved. 23

24 Application example Basic computation (cont.) Grant Thornton LLP. All rights reserved. 24

25 Application example Comparative analysis Grant Thornton LLP. All rights reserved. 25

26 Agenda 5 Observations Grant Thornton LLP. All rights reserved. 26

27 Observations 1 Value of a directive 2 Size of the safe harbor 3 Analysis considerations 4 ASC 740 considerations Grant Thornton LLP. All rights reserved. 27

28 Questions? Grant Thornton LLP. All rights reserved. 28

29 Speakers Mark Andrus R&D Credit National Leader Strategic Federal Tax Services Dan Mennel West Region Leader Strategic Federal Tax Services Lauren Mitchell Manager Strategic Federal Tax Services Grant Thornton LLP. All rights reserved. 29

30 Disclaimer This Grant Thornton LLP presentation is not a comprehensive analysis of the subject matters covered and may include proposed guidance that is subject to change before it is issued in final form. All relevant facts and circumstances, including the pertinent authoritative literature, need to be considered to arrive at conclusions that comply with matters addressed in this presentation. The views and interpretations expressed in the presentation are those of the presenters and the presentation is not intended to provide accounting or other advice or guidance with respect to the matters covered For additional information on matters covered in this presentation, contact your Grant Thornton LLP adviser

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