US IRS explains steps to adjust for tax R&D costs reported in financial statements

A practice unit issued by the US Internal Revenue Service on July 7 walks through the steps for large business & international (LB&I) taxpayers to adjust research and development (R&D) expenses reported in financial statements in determining qualified research expenditures for tax purposes. IRS “practice units” are internal training materials developed for agency employees.

In the practice unit, the IRS notes that taxpayers that follow US generally accepted accounting principles (GAAP) use Accounting Standards Codification (ASC) Topic 730: Research and Development for disclosing R&D costs on their financial statements. The IRS adds that the similarities between ASC 730 and R&D tax code provisions make it easier for the IRS to examine taxpayer’s qualified research expenditures when the taxpayer attests it has followed ASC 730, minus specifically excluded costs.

The practice unit explains the guidance under a revised directive on ASC 730 that was issued by the IRS in September 2020 and reviews the steps for reconciling differences between financial statement R&D expenditures and those allowed under the Internal Revenue Code. The revised directive and the practice unit only apply to LB&I taxpayers that follow GAAP to prepare their certified audited financial statements. LB&I taxpayers generally include businesses reporting assets of at least USD 10 million.

For eligible LB&I taxpayers that satisfy the requirements of the revised directive, IRS examiners may accept as sufficient evidence of qualified research expenditures the adjusted ASC 730 financial statement R&D for the credit year.