Cracking the Code
What are the four tests an activity must meet to qualify as "qualified research" under Section 41?
1. Qualified Purpose
2. Technical Uncertainty
3. Process of Experimentation
4. Technological in Nature
See Treasury Regulation 1.41-4(a)(5)
What section of the new Form 6765 provides additional details or information about the total QREs reported in Section F?
Section E
Which IRC section defines controlled groups for R&D credit aggregation?
IRC §41(f)
What is the effective date for the Big Beautiful Bill’s amendments to Section 174 and related rules?
Taxable years beginning after December 31, 2024.
True or False: All U.S. states offer an R&D tax credit.
False
After how many years do taxpayers lose their federal carryforward credits?
20
When did President Trump sign the Big Beautiful Bill into law?
July 4, 2025
What are 3 examples of software testing?
Unit Testing
Integration Testing
System Testing
Regression Testing
Alpha Testing
Beta Testing
Stress Testing
Performance Testing
In what year was the federal R&D tax credit first introduced, and when was it made permanent?
1981 for the introduction and it was made permanent in 2015.
Under IRC §41(d)(2)(B), what is a business component?
The term “business component” means any product, process, computer software, technique, formula, or invention which is to be—
(i) held for sale, lease, or license, or
(ii) used by the taxpayer in a trade or business of the taxpayer.
What is a potential penalty for filing an insufficiently substantiated R&D claim?
- Denial of refund.
- Imposition of accuracy-related penalties.
True or False: Members of a controlled group can elect different R&D credit calculation methods.
False
Under the Big Beautiful Bill, what change in method of accounting rules apply to Section 174A expenditures?
Changes are treated as taxpayer-initiated, with Secretary consent, applied on a cut-off basis, and no Form 3115 is required.
The Oregon Legislature passed House Bill (HB) 2009 on June 24, 2023, which in part creates a refundable income and corporate excise tax credit for qualified _______ companies conducting qualified research activities.
Semiconductor.
Data gathering and analysis that does not involve testing or experimentation is excluded. What IRS term explains this type of disqualified activity?
Routine Data Collection
What is in the numerator of the substantially all test - in reference to Little Sandy Coal Co., Inc. v. Commissioner?
Taxpayer's research activities constituting elements of a process of experimentation - Direct R&D activities - Labor and Contract Research.
What are the 4 stages of pharmaceutical product development process?
- Pre-Clinical/Discovery
- Clinical Development
- Regulatory Review
- Post Marketing
Which Act made the R&D credit permanent and also expanded its applicability, including payroll tax offsets for startups?
The Protecting Americans from Tax Hikes (PATH) Act of 2015.
Under IRC §41(d)(4), name the types of research activities that are specifically excluded from qualifying for the credit.
- Research after commercial production.
- Adaption of existing business components.
- Duplication of existing business component.
- Surveys, studies, etc.
- Computer Software.
- Foreign Research
- Social Sciences, etc.
- Funded Research
In Section G of the Form 6765, how many business components are required to be reported?
Complete for at least 80% of total QREs by business component, but no more than 50, listed in descending order.
Under IRC §41(f), when a taxpayer is a member of a controlled group or a group under common control, how is the research credit computed and allocated among the members?
The credit must be computed on a combined basis for the entire controlled group and allocated to each member in proportion to the amount of each member’s qualified research expenses, basic research payments, and amounts paid or incurred to energy research consortiums,
See IRC §41(f)(1)(A) and Treas. Reg. §1.41-6(a)
What is the deadline for an eligible small business taxpayer to file amended returns to take into account 174A?
No later than one year after the date of enactment - July 4, 2026.
Unlike the federal credit, many states do not allow which common calculation method?
The Alternative Simplified Credit (ASC) method.
Most states only allow a version of the Regular Credit method or a flat percentage of QREs.
Companies with more than ___ in gross receipts are not eligible for the payroll tax offset.
$5 Million
What was the central issue in Union Carbide Corp. v. Commissioner related to R&D credit eligibility?
Whether Union Carbide could claim credits for the full cost of supplies used in its manufacturing process during qualified research, even when those supplies would have been used anyway to produce goods for sale.
What does IRC §460(c) relate to?
Methods of accounting for long-term contracts.
CHRPS
Which law, signed in 2022, introduced the requirement that research and experimental expenditures must be capitalized and amortized rather than immediately deducted?
The Inflation Reduction Act of 2022.
What are the examples of costs that are SRE expenditures under Notice 2023-63?
- Labor Costs
- Materials and Supplies Costs
- Cost Recovery Allowances
- Patent Costs
- Certain Operation and Management Costs
- Travel Costs
Once a taxpayer elects the Alternative Simplified Credit (ASC) on a timely filed original return, under Treas. Reg. §1.41-9(b)(2), can they revoke or change the election for that calendar year?
No. The ASC election is irrevocable for that year once made on a timely filed original return.
When completing Form 6765 Section E - if you are a member of a controlled group, what amount of QREs are entered into this section?
Complete this section for only the filing member's QREs.
For any domestic R&E expenditures in taxable years beginning 2022-2024, and which was charged to capital account, a taxpayer may elect to deduct the remaining unamortized amount either:
- In the first tax year beginning after December 31, 2024.
or
- Ratably over the 2-tax year period beginning with the first tax year beginning after December 31, 2024.
Which state has no corporate income tax, but still offers an R&D credit that applies to franchise or gross receipts taxes, making strategic entity structuring important?
Texas
What is the IRS’s most common challenge regarding R&D tax credit claims related to the taxpayer’s process documentation?
Insufficient or lack of contemporaneous documentation demonstrating the process of experimentation and technical uncertainty.
What do Suder v. Commissioner, T.C. Memo. 2014-201 and Owensby & Kritikos, Inc. v. Commissioner, 819 F.2d 1315 (5th Cir. 1987) have in common?
Think technical topic.
Executive Compensation / Reasonable Compensation
How do California's gross receipt rules differ from Federal and why does it impact clients within a few industries?
Only include receipts of sales of tangible goods. Software/services are not included.
When it is a short credit year, the base amount should be _______.
Prorated.
According to Treas. Reg. §1.41-4(c), what additional requirements must be met for internal-use software to qualify for the R&D credit, and what is the “high threshold of innovation” test?
- Must meet the four-part test.
- Innovative.
- Significant Economic Risk
- Not Commercially Available
What must be included when filing a refund claim for R&D credit under IRS Chief Counsel Memo 20214101F?
- Identify all the business components.
- For each business component:
1. Identify all research activities performed
2. Identify all individuals who performed each research activity. (removed for claims after June 18, 2024)
3. Identify all the information each individual sought to discover. (removed for claims after June 18, 2024)
- Provide the total qualified employee wage expenses, total qualified supply expenses, and total qualified contract research expenses for the claim year.
When completing Form 6765 Section G, how are business components reported for entities of a controlled group?
If you are a member of a controlled group and file separate tax returns and you are required to complete Section G you must report at least 80% of your total QREs (not the group’s total QREs) by business component, but report no more than 50 of your business components. Report any remaining business components in aggregate by entering “Aggregate BCs” in column 49(c) and the applicable aggregate amounts for columns 50 through 56, leave all other columns in Section G blank.
Who qualifies as an “eligible taxpayer” able to elect retroactive application of the Section 174A and 280C amendments to taxable years starting after December 31, 2021?
A taxpayer meeting the gross receipts test of Section 448(c) with average prior three-year gross receipts under $31 million.
The Arizona Commerce Authority (ACA) has been given the authority to approve refunds up to what amount in calendar year 2025?
$5 million
Research paid for by a third party generally does not qualify for the credit. What is the IRS term for this type of research, and why is it excluded?
Funded Research
It is excluded because the taxpayer neither bears the risk nor retains the rights to the research results, disqualifying it under IRC §41(d)(4)(H).
What court case released in 2023 references pilot models?
Betz v. Commissioner (T.C. Memo 2023-84)
At a high level, what does Technical Advice Memorandum 9522001 say and why is it applicable within FBA?
Taste as used in 41(d)(3)(B) means individual or consumer preference not sensory taste. In the case of food products, new product development and improvements to existing products may relate to texture, smell and flavor. These characteristics affect taste in sensory context.
Alternative Simplified Credit:
___ of the current year QREs that exceed 50% of the average qualified research expenses for the three preceding tax years
___ of the current year QREs if the taxpayer does not have QREs in each of the 3 preceding tax years
What are the missing %s?
14% and 6%