News from America

Appeals Court Eases Rules on Qualified Research Expenses

The United States Court of Appeals for the 5th Circuit issued a ruling on June 9, 2009 that directs a lower court to ease interpretation of IRS rules on research credit calculation, and particularly endorses the use of reasonable estimates when precise cost figures are not available. In USA v. McFerrin, the IRS claimed that a refund it had paid for a research credit claim should be returned because the claim was not sufficiently documented. Specifically, the Service was found to have used a very narrow interpretation of the applicable rules regarding the identification of eligible activities and their related expenses. The court disagreed with the IRS position and instructed the lower court to revisit the issue.

This is a significant taxpayer victory because recent pronouncements from IRS had led many companies that could potentially gain significant benefits from the Research Credit program to forego any claims, fearing an IRS audit. The new ruling clarifies the incentive nature of this program and will hopefully encourage many more companies to apply.

The complete decision can be found at docket number 08-20377, USA v. McFerrin.

Research Credit Extended Through 2009

On October 3, 2008 the 110th Congress passed H.R. 1424, The Economic Stabilization Act of 2008. This large spending bill extended several expiring provisions of the tax code. The research credit was extended through December 31, 2009. The credit was further strengthened by increasing the Alternative Simplified Credit rate to 14%. This is the 13th time that Research and Development tax credit has been renewed since its inception in 1981.

President Barack Obama has stated that he wants to make the Research and Development tax credit permanent to allow firms to feel confident when making decisions to invest in domestic R&D in longer term planning. If sucessful, this proposed legislation would reduce uncertainty faced by firms engaged in technological development, allowing them to invest in experimentation without worrying that vital funding might evaporate. If you are interested in helping to ensure passage of this provision, please call or write to your elected representatives.

News from Canada

CRA Relaxes Requirements for SR&ED Claim Document Submission

On June 11, 2009, Canada Revenue Agency issued guidance regarding new requirements for submission of supporting documents relating to claims for tax credit support. Regulatory changes announced last November have been revised to provide additional time for taxpayers to respond. Specifically, the requirement for separate and distinct reports to be submitted for each and every project claimed has been postponed for one year. Thus, only the top twenty projects must be included with claims for tax years beginning before 2010.

More information about this and other recent developments can be found at CRA's web site.

CRA Announces New Claim Procedure

In November 2008, CRA implemented a new Form T661, along with modified instructions. By making it easier for businesses to apply for the SR&ED tax credit, it hopes to encourage Candian research. The SR&ED program is now offering a web based eligibility self-assessment tool and has also produced updated electronic and printed information for new and existing claimants.

As explained during informational sessions sponsored by CRA over the past year, the Scientific Research and Experimental Development program continues to receive strong support. Claim volumes are up sharply as more and more companies become aware of the program and its benefits. In addition, service times per claim are decreasing for all claim categories. The reduction in claim review time is due in significant part to the dedicated focus brought to bear by the program administrators throughout the country.