R&E Engineering Background & Substantiation

How many of you have had challenges addressing the IRS’ need for technical, engineering discussions regarding research activities? If you answered “Me!” you’re not alone.

Recent times have demonstrated that some IRS exam teams are basing their positions on what appear to be unreasonable and often times incorrect engineering assertions. The result is that IRS exam teams are more and more focusing on engineering substantiation and detailed documentation requirements prior to approving R&E deduction and credit claims.

What can you do?

First and foremost, be prepared to provide the exam teams not only a high-level understanding of the R&E activities being claimed, but be prepared to document the research performed, why it’s critical and the uncertainties that it is intended to uncover.

So how can you prepare yourself for this during exams?

First, have your engineering/technical team prepare detailed descriptions of the activities from a fact-based perspective, explaining the process and techniques used as part of the research.

Second, understand the outcomes attempting to be resolved and why its important to the overall project or activity success.

Third, understand how these activities fit into the process of experimentation. You should understand the R&D or engineering processes used by the company and how the processes fit and meet the criteria of the Process of Experimentation test.

Fourth, keep the discussions with the exams team to specifics. Don’t get into broad-brushed research discussions. Address each question specifically with direct conversation about how the activity answers each of the four part tests.

Helpful tips

The R&D tax rules and regulations are not always black and white. Often there is a true difference of opinion on whether a particular activity is deduction and/or credit worthy. So here are a few tips that may be helpful:

  • The outcome of the research being conducted is not relevant to determine whether an activity is considered research. The issue of concern is, did the activity performed attempt to resolve a technical uncertainty related to capability, method, or design.
  • Communication is key, so don’t talk in generalizations with the IRS. Be specific and ask for specifics when being asked a question.
  • Request clarity around areas where the IRS has disallowed activities as R&D. You have a right to know and understand the rationale behind their decisions.

More on BCP

BCP is an engineering services firm with 26 years of engineering experience and know-how. Over the last six years, we have developed a unique approach to R&D and an experienced team of R&D engineers and professionals that work for and with your tax group to provide complete and accurate technical substantiation for your R&D claim.

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