New IRS guidance for reporting R&D costs

November 6, 2019

To address the complex rules surrounding the federal research and development (R&D) tax credit, the IRS’s Large Business and International division recently issued two documents to clarify what expenses should be reported.

The first item is a concept unit regarding costs under Accounting Standard Codification (ASC) Topic 730, “Research and Development,” and how they relate to Internal Revenue Code (IRC) sections 41 and 174. The second document is a process unit that explains how to accurately compute qualified research expenses under IRC section 41.

The two documents define R&D costs, activities that are allowed (or excluded) as expenditures and the proper treatment of tangible and intangible assets. The documents, specifically the process unit for ASC 730, also include guidance for separately identifying expenses that exceed the adjusted R&D amount.

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