Q: We track a significant amount of R&D for book purposes under ASC 730. Historically, we have captured qualified activity and related expenses inside and outside of these cost centers. By utilizing the LBI Directive (LB&I-04-0820–0016; 2020 ASC 730 Directive) as a safe harbor for those qualified expenses in the ASC 730 accounts, can we include QREs captured outside these cost centers in our calculation or are we limited to only those that qualify under the LB&I Directive?
Colette Gagnet’s answer is:
Great news! You can use a hybrid approach to calculating your R&D credit. The less exciting news is that the documentation standards still stand for those areas outside the LB&I Directive. For those expenses categorized as R&D under ASC 730 for book purposes and qualify under Sec. 41, you can apply for the safe harbor as long as you adhere to the filing requirements listed in the LB&I Directive.
For QREs booked to other cost centers, you can use a more traditional approach to documenting qualified activity and capturing related QREs. Some examples of qualified activity captured outside of the safe harbor relate to:
- software development,
- manufacturing plant process improvements,
- and certain support and supervision activities.
The IRS can still challenge these activities and expenses if the IRS deems the LB&I Directive requirements are not met. If you have ASC 730 expenses, it’s definitely worth a discussion with your R&D provider.
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