The R&D Credit is a valuable incentive to small, medium, and large businesses, but is underutilized due to a lack of understanding of the pertinent rules and regulations.  The resources on this page aim to provide a solid overview of federal R&D Credit fundamentals, and serve as a starting point for taxpayers seeking to fully capitalize on this incentive.

Federal R&D Credit Law

The Federal  R&D Credit (or “Credit For Increasing Research Activities,” as it is officially titled) is codified as Section 41 of the Internal Revenue Code.  The statute can be viewed in its entirety at the following link:

• USC Title 26 §41: Credit for Increasing Research Activities

Federal R&D Credit Regulations

Regulations issued by the Treasury Department both clarify and elaborate on the the provisions of the federal R&D Credit statute.  The current body of pertinent regulations can be reviewed at the following links:

• Reg. §1.41-0: Table of contents
• Reg. §1.41-1: Credit for increasing research activities
• Reg. §1.41-2: Qualified research expenses
• Reg. §1.41-3: Base amount for taxable years beginning on or after Jan 3, 2001
• Reg. §1.41-4: Qualified research for expenditures paid or incurred in taxable years ending on or after December 31, 2003
• Reg. §1.41-4A: Qualified research for taxable years beginning before January 1, 1986
• Reg. §1.41-5: Basic research for taxable years beginning after December 31, 1986 (Reserved)
• Reg. §1.41-5A: Basic research for taxable years beginning before January 1, 1987
• Reg. §1.41-6: Aggregation of expenditures
• Reg. §1.41-7: Special rules
• Reg. §1.41-8: Special rules for taxable years ending on or after January 3, 2001

Case Law

The following decisions have played a pivotal role in defining the qualification, quantification, and documentation of the federal R&D credit.  This listing is by no means exhaustive, but touches on the most relevant and widely applicable cases.

• Cohan v. Commissioner: addresses the use of estimations when concrete documentation is unavailable.  While the ruling is not specific to the R&D credit, it provides useful guidance on the assessment of qualifying expenditures.
• Fudim v. Commissioner: applies the principles of Cohan v. Commissioner to the allocation of qualified wages for the R&D Credit.
• U.S. v. McFerrin: addresses issues of documentation and estimation in the support of R&D Credit claims.
• FedEx Corp v. U.S.: addresses the qualification of expenditures related to the development of software for internal use.
• Union Carbide Corp v. Commissioner: addresses several key issues in assessment of the federal R&D Credit
• TG Missouri Corp v. Commissioner: addresses the definition of qualified supply costs

A more comprehensive listing of R&D case law can be found on TechnologyTax.com’s R&D Credit Court Decisions page.

Substantiation and Audit

There is a very contentious history surrounding the federal R&D Credit.  As the definition of qualified research has gradually broadened, so has the degree of scrutiny placed on credit claims.  The links below provide insight into the IRS’ evaluation of credit claims, and the necessary documentation to successfully defend a credit claim.

• Tier I Directive: Established Research Credit claims as a transaction subject to high scrutiny
• Audit Techniques Guide: Credit for Increasing Research Activities
• Aerospace Industry – Audit Techniques Guide : Provides a thorough overview of the issues surrounding contract research activities.
• Pharmaceutical Industry Research Credit Audit Guidelines