{"id":10653,"date":"2022-07-26T20:42:38","date_gmt":"2022-07-26T20:42:38","guid":{"rendered":"https:\/\/taxops.com\/?p=10653"},"modified":"2022-12-12T20:32:21","modified_gmt":"2022-12-12T20:32:21","slug":"answers-to-your-burning-re-expenditure-and-rd-tax-credit-questions","status":"publish","type":"post","link":"https:\/\/taxops.com\/answers-to-your-burning-re-expenditure-and-rd-tax-credit-questions\/","title":{"rendered":"Answers to Your Burning R&#038;E Expenditure and R&#038;D Tax Credit Questions"},"content":{"rendered":"\n<div style=\"height:53px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<figure class=\"wp-block-gallery has-nested-images columns-default is-cropped wp-block-gallery-1 is-layout-flex wp-block-gallery-is-layout-flex\">\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" width=\"1024\" height=\"536\" data-id=\"10658\" src=\"data:image\/gif;base64,R0lGODlhAQABAIAAAAAAAP\/\/\/yH5BAEAAAAALAAAAAABAAEAAAIBRAA7\" data-src=\"https:\/\/taxops.com\/wp-content\/uploads\/2022\/07\/Answers-to-Your-Burning-RE-Expenditure-and-RD-Tax-Credit-Questions-1-1024x536.png\" alt=\"\" class=\"wp-image-10658 lazyload\" data-srcset=\"https:\/\/taxops.com\/wp-content\/uploads\/2022\/07\/Answers-to-Your-Burning-RE-Expenditure-and-RD-Tax-Credit-Questions-1-1024x536.png 1024w, https:\/\/taxops.com\/wp-content\/uploads\/2022\/07\/Answers-to-Your-Burning-RE-Expenditure-and-RD-Tax-Credit-Questions-1-980x513.png 980w, https:\/\/taxops.com\/wp-content\/uploads\/2022\/07\/Answers-to-Your-Burning-RE-Expenditure-and-RD-Tax-Credit-Questions-1-480x251.png 480w\" sizes=\"(min-width: 0px) and (max-width: 480px) 480px, (min-width: 481px) and (max-width: 980px) 980px, (min-width: 981px) 1024px, 100vw\" \/><noscript><img decoding=\"async\" width=\"1024\" height=\"536\" data-id=\"10658\" src=\"https:\/\/taxops.com\/wp-content\/uploads\/2022\/07\/Answers-to-Your-Burning-RE-Expenditure-and-RD-Tax-Credit-Questions-1-1024x536.png\" alt=\"\" class=\"wp-image-10658 lazyload\" srcset=\"https:\/\/taxops.com\/wp-content\/uploads\/2022\/07\/Answers-to-Your-Burning-RE-Expenditure-and-RD-Tax-Credit-Questions-1-1024x536.png 1024w, https:\/\/taxops.com\/wp-content\/uploads\/2022\/07\/Answers-to-Your-Burning-RE-Expenditure-and-RD-Tax-Credit-Questions-1-980x513.png 980w, https:\/\/taxops.com\/wp-content\/uploads\/2022\/07\/Answers-to-Your-Burning-RE-Expenditure-and-RD-Tax-Credit-Questions-1-480x251.png 480w\" sizes=\"(min-width: 0px) and (max-width: 480px) 480px, (min-width: 481px) and (max-width: 980px) 980px, (min-width: 981px) 1024px, 100vw\" \/><\/noscript><\/figure>\n<\/figure>\n\n\n\n<div style=\"height:53px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<blockquote class=\"wp-block-quote is-layout-flow wp-block-quote-is-layout-flow\">\n<p class=\"wp-block-paragraph\"><em><em><em><em><a href=\"https:\/\/taxops.com\/jamie-overberg\/\" target=\"_blank\" rel=\"noreferrer noopener\"><em>Jamie Overberg<\/em><\/a><em>, Partner at TaxOps Minimization, shares insights on R&amp;D expenses and credits with a panel of tax professionals for Bloomberg Tax.&nbsp;<\/em>&nbsp;<\/em><\/em><\/em><\/em><\/p>\n<\/blockquote>\n\n\n\n<div style=\"height:8px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<p class=\"wp-block-paragraph\">By Hogan Humphries, Jamie Overberg, Lawrence Sannicandro, and Jonathan Forman*&nbsp;&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">KPMG LLP, TaxOps, McCarter &amp; English, LLP, GTM Tax&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Washington D.C., Golden, CO, New York, NY, Newark, NJ<\/p>\n\n\n\n<div style=\"height:8px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<p class=\"wp-block-paragraph\">Reproduced with permission from Tax Management Memorandum, 63 TMM 16, 08\/01\/2022. Copyright R 2022 by The Bureau of National Affairs, Inc. (800-372-1033) <a href=\"http:\/\/www.bna.com\" target=\"_blank\" rel=\"noopener\">http:\/\/www.bna.com <\/a><\/p>\n\n\n\n<div style=\"height:35px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<div style=\"height:15px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>BACKGROUND<\/strong><\/h2>\n\n\n\n<div style=\"height:15px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<p class=\"wp-block-paragraph\">There are two recent developments that significantly impact businesses\u2019 entitlement to tax benefits for the cost of research and experimental (R&amp;E) expenditures. First, for amounts paid or incurred in taxable years beginning on or after January 1, 2021, taxpayers are faced with the reality that R&amp;E expenditures are no longer deductible but must be capitalized and amortized under \u00a7174, as amended by the 2017 Tax Cuts and Jobs Act (TCJA). More specifically, domestic R&amp;D expenses must be amortized over five years and foreign R&amp;D expenses must be amortized over 15 years.&nbsp;&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The second development, effective January 10, 2022, involved the IRS beginning to require taxpayers who claim the R&amp;D tax credit under \u00a741 in a refund claim to include specific and detailed information concerning the taxpayer\u2019s entitlement to the claimed refund. According to a Field Attorney Advice 20214101F (FAA 20214101F), for a taxpayer\u2019s refund claim and for the \u00a741 R&amp;D credit to be valid, the taxpayer must, at a minimum, identify all business components to which the \u00a741 R&amp;D credit claim relates for that year. For each business component, the taxpayer must do the following: (1) identify all R&amp;D activities performed; (2) identify by name, title, or position each individual who performed each R&amp;D activity (the IRS has special rules for aggregating information where a group of individuals worked together on R&amp;D activities); and (3) identify all of the information each individual sought to discover.&nbsp;&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">In addition, FAA 20214101F provides that the taxpayer must also provide the total qualified employee wage expenses, total qualified supply expenses, and total qualified contract research expenses for the claim year. This information may be provided on IRS Form 6765, Credit for Increasing Research Activities (such items, collectively, the \u2018\u2018five items of information\u2019\u2019).&nbsp;&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The IRS instructs taxpayers to provide the facts in a written statement rather than through the production of documents. Moreover, if a taxpayer does provide documents, such as a tax credit study, the taxpayer is instructed to specify the exact page(s) that support a specific fact. Finally, the taxpayer must provide a declaration, signed under penalties of perjury, verifying that the facts provided are accurate. For this purpose, the signature on the taxpayer\u2019s claim for refund usually satisfies this requirement. In FAA 20214101F, the IRS instructs its employees to reject any refund claim involving the \u00a741 R&amp;D tax credit that does not include the five items of information with the claim. On January 3, 2022, the IRS issued changes to the Internal Revenue Manual and Research Credit Claims (Section 41) on Amended Returns Frequently Asked Questions adopting a one year transition period during which taxpayers will be allowed 45 days within which to perfect a refund claim that does not include the five items of information.&nbsp;&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Below, four distinguished tax professionals provide answers to frequently asked questions on trending topics in the R&amp;E and R&amp;D space.&nbsp;<\/p>\n\n\n\n<div style=\"height:35px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h2 class=\"wp-block-heading\"><strong><strong>R&amp;D AND R&amp;E Q&amp;A<\/strong><\/strong><\/h2>\n\n\n\n<div style=\"height:30px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<p class=\"wp-block-paragraph\"><strong>1. What is the impact of the mandatory capitalization of R&amp;E expenditures to corporate tax departments? Such as in their quarterly tax provision calculations and estimated tax payments?&nbsp;<\/strong>&nbsp;<\/p>\n\n\n\n<div style=\"height:15px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<p class=\"wp-block-paragraph\"><strong>Hogan Humphries:<\/strong> The end result has been impacts to the quarterly tax provision calculations, as well as increases in estimated tax payments for some taxpayers, but the main impact to corporate tax departments has been trying to determine how much time and effort to invest into these changes. Most corporate tax departments are taking the view that these changes will eventually be repealed or deferred and that the effects of mandatory capitalization will never be reported on a tax return. As a result, they are trying to get a reasonable estimate for the tax provision and estimated payments without spending an exorbitant amount of time and effort on this issue. As we have had conversations with our clients some have been surprised at the broad implications of the \u00a7174 changes.&nbsp;&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><strong>Jamie Overberg<\/strong>: Beginning January 1, 2022, all companies \u2014 from multi-billion-dollar corporations to small business owners \u2014 began capitalizing \u00a7174 expenses, spreading the amortization of those expenses either five or 15 years. These changes hit first quarter estimates. Taxpayers lost current year deductibility in 2022 and these changes were reflected on Q1 financial statements and Q1 estimates. The change may be having a huge financial impact on all taxpayers and primarily impacts:&nbsp;&nbsp;<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Businesses making use of \u00a7174 expense deductions;&nbsp;&nbsp;<\/li>\n\n\n\n<li>Businesses claiming R&amp;D credits;&nbsp;&nbsp;<\/li>\n\n\n\n<li>Companies preparing income tax provisions;&nbsp;&nbsp;<\/li>\n\n\n\n<li>Companies who make quarterly estimated tax payments; and&nbsp;&nbsp;<\/li>\n\n\n\n<li>Multinational companies with Base Erosion and Anti-Abuse Tax (BEAT) and Global Intangible Low-Taxed Income (GILTI) consequences.&nbsp;&nbsp;<\/li>\n<\/ul>\n\n\n\n<p class=\"wp-block-paragraph\">More specifically, amortization could cause a loss entity to be taxable or increase taxable income for a profitable entity. For companies in a loss situation, \u00a7174 capitalization will be deemed profitable and will have to pay tax. This could mean a startup company may have to pay taxes when they have not yet turned the corner.&nbsp;&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Entities who have generated taxable losses and have therefore put off calculating an R&amp;D tax credit due to those losses may want to consider calculating these credits. An R&amp;D tax credit may offset some of the potential taxes resulting from the disallowed \u00a7174 expenses.&nbsp;&nbsp;<\/p>\n\n\n\n<div style=\"height:30px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<p class=\"wp-block-paragraph\"><strong>2. What are some of the outstanding technical issues that have not been addressed by Treasury or IRS guidance surrounding the change to \u00a7174?&nbsp;<\/strong>&nbsp;<\/p>\n\n\n\n<div style=\"height:15px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<p class=\"wp-block-paragraph\"><strong>Hogan Humphries<\/strong>: There are several issues that need to be addressed, but I believe the most pressing technical issue has to do with determining whether capitalization is required if the taxpayer is not able to exploit the results of the research in its trade or business. This is especially prevalent with large multinational corporations where development expenses may be fully reimbursed through various types of intercompany agreements.&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The other main issues are related to how wide of a net should be cast in determining the types of costs that are incident to research and experimentation and how broadly software development is defined. The new rules state that all expenses associated with the development of any software shall be treated as R&amp;E expenditures. This appears to eliminate any uncertainty requirement from the \u00a7174 regulations4 and leaves open the possibility that even simple software development, such as a simple script written by an IT department, may be considered software development and require capitalization.&nbsp;&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Lastly, there is some confusion over whether an accounting method change will be required to implement these new provisions and it would be helpful to have procedural guidance from the IRS on how to implement these changes.&nbsp;&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><strong>Jamie Overberg:<\/strong> In a letter to the IRS, we at TaxOps requested guidance that identifies cost categories for \u00a7174(a) expenditures. The regulations apply general standards to costs incidental to the development or improvement of a product. Section 174 further focuses on the nature of activities that fall under R&amp;E expenditures, rather than clarifying specific categories for expenditures. We recommend that the regulations delineate the various categories of expenses, both direct and indirect, that fall under the definition of R&amp;E expenditures.&nbsp;&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The regulations exclude eligibility of certain expenditures including ordinary testing for quality control, management studies, and advertising and promotions, among others. While interpretive guidance suggests that allocable indirect costs and overhead may be \u00a7174 eligible, we recommend clarifying the incidental costs to develop or improve a product per Reg. \u00a71.174-2.&nbsp;<\/p>\n\n\n\n<div style=\"height:30px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<p class=\"wp-block-paragraph\"><strong>3. Is there any indication when the IRS or Treasury will issue \u2018\u2018guidance addressing amortization\u2019\u2019 as laid out in the Priority Guidance Plan for 2022\u20132023? (Notice 2022-21).&nbsp;<\/strong>&nbsp;<\/p>\n\n\n\n<div style=\"height:15px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<p class=\"wp-block-paragraph\"><strong>Hogan Humphries<\/strong>: The IRS has indicated that they are working on two forms of guidance to addresses these issues. One will most likely be in the form of most likely automatic method change procedures for taxpayers to switch their method of accounting to the new capitalization method required by new \u00a7174 and the other guidance will address substantive issues. The IRS indicated at a recent American Bar Association meeting that the procedural guidance should be issued prior to year-end. Timing of any other guidance is uncertain and may be dependent on whether Congress repeals or further defers the \u00a7174 changes.&nbsp;&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><strong>Jamie Overberg:<\/strong> We have requested additional guidance within the comment period.&nbsp;&nbsp;<\/p>\n\n\n\n<div style=\"height:30px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<p class=\"wp-block-paragraph\"><strong>4. What are the prospects of legislation from either the House of Representatives or the Senate in the current congressional session that would restore the previous \u00a7174 treatment of R&amp;E expenditures to allow a deduction or deferred expenses? What about legislation that extends the effective date of the changes to \u00a7174 to 2023 or 2024?&nbsp;<\/strong>&nbsp;<\/p>\n\n\n\n<div style=\"height:15px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<p class=\"wp-block-paragraph\"><strong>Hogan Humphries:<\/strong> There is broad bipartisan support for either a permanent fix or at least a deferral of the \u00a7174 capitalization requirement. The biggest issue doesn\u2019t appear to be whether the issue will be remedied but primarily a question of when. The current consensus appears to be that there will be a tax extenders bill in December that will reverse mandatory \u00a7174 capitalization at least temporarily but that still means that corporate tax departments will be dealing with changes to their tax provision calculation and increased estimated tax payments for the remainder of the year. Many taxpayers would prefer to see mandatory capitalization repealed or expended sooner rather than later.&nbsp;&nbsp;<\/p>\n\n\n\n<div style=\"height:30px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<p class=\"wp-block-paragraph\"><strong>5. How would you define the scope of R&amp;E projects and expenses under \u00a7174? As relates to costs alone, is there an argument under the Code or through current IRS guidance to narrow the scope of these expenses now that it is less advantageous?&nbsp;<\/strong>&nbsp;<\/p>\n\n\n\n<div style=\"height:15px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<p class=\"wp-block-paragraph\"><strong>Hogan Humphries<\/strong>: I would broadly define both the expenses and costs and note that unlike the R&amp;D tax credit there is not a funding exclusion nor is there a restriction that the costs only be incurred in the United States. One of the main arguments to narrow the scope of \u00a7174 is to argue that a taxpayer does not have the rights to exploit the results of their research in their trade or business, then expenses could be more appropriately categorized as \u00a7162 expenses. Beyond that, a detailed project by project analysis will be needed to determine which types of activities and costs can be potentially excluded from \u00a7174.&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><strong>Jamie Overberg<\/strong>: Without further guidance from the IRS, we as tax specialty advisors need to operate within currently understood parameters of the law. Accordingly, the scope of project and expenses fall under the \u2018\u2018uncertainty test\u2019\u2019 and as defined under \u00a7174 are more expansive than under \u00a741. Wages, supplies, outside contract (at 65%) and leased computer costs are eligible for research tax credits. The items to be capitalized under \u00a7174, however, include many more costs, such as computer expenses, office expenses, professional fees (including 100% of contract labor and temporary help), R&amp;D travel expenses, rent, salaries and benefits, utilities, and miscellaneous expenses.&nbsp;&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><strong>Jonathan Forman<\/strong>: Certain costs \u2014 e.g., noncore R&amp;D costs \u2014 can, by overlapping definition, be classified in different ways. Historically this hasn\u2019t been an issue as they were deductible. Now, however in order to claim an R&amp;D tax credit on the costs, they must be treated under \u00a7174. One exception now is software development costs which used to be treatable under Rev. Proc. 2000-50, is now considered \u2018\u2018specified\u2019\u2019 R&amp;E and must be treated as an R&amp;E expenditure under \u00a7174.&nbsp;<\/p>\n\n\n\n<div style=\"height:30px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<p class=\"wp-block-paragraph\"><strong>6. Is there interplay (if any) between the changes to the \u00a7163(j) interest deduction and \u00a7174 R&amp;E expenditures? How does this affect corporate filing and quarterly tax provision calculations of corporate tax departments?<\/strong>&nbsp;&nbsp;<\/p>\n\n\n\n<div style=\"height:15px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<p class=\"wp-block-paragraph\"><strong>Hogan Humphries<\/strong>: In the event that the requirement to capitalize \u00a7174 expenses increase a taxpayer\u2019s taxable income, there could be an interplay with \u00a7163(j). As with any changes, taxpayers should model the effects of changes to taxable income in determining their \u00a7163(j) interest deduction and consider possible method changes to increase adjusted taxable income.&nbsp;&nbsp;<\/p>\n\n\n\n<div style=\"height:30px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<p class=\"wp-block-paragraph\"><strong>7. What practice pointers can you provide corporate tax departments in implementing the R&amp;E expenditure changes from \u00a7174 into their filing practices and procedures?&nbsp;<\/strong>&nbsp;<\/p>\n\n\n\n<div style=\"height:15px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<p class=\"wp-block-paragraph\"><strong>Hogan Humphries:<\/strong> At this point, it is hard to recommend that taxpayers implement changes to their filing practices and procedures given the belief that Congress will eventually pass legislation to extend or repeal mandatory capitalization. If they have not already, corporate tax departments should keep management informed about increased estimated tax payments and should consider possible methods to identify \u00a7174 costs if Congress doesn\u2019t act. Barring exceptions for short year returns or other unusual situations, the first tax returns reflecting mandatory capitalization of \u00a7174 expenses won\u2019t be filed until 2023. The hope is that Congress will restore immediate expensing of \u00a7174 expenses by then.&nbsp;&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><strong>Jamie Overberg<\/strong>: Every company that has R&amp;E expenditures under\u00a7174 are required to capitalize all R&amp;D costs. This includes departmental and personnel costs associated with R&amp;D, such as software engineering, design engineering, project management, and all other departments that support R&amp;D. Whereas under \u00a741, only some of those costs may be applied to the credit calculation. Some companies are using their ASC 730 number, and then adjusting out foreign costs and already capitalized items as their \u00a7174 number, resulting in a faster \u00a7174 determination. While not necessarily wrong, it might result in a more taxable outcome than necessary. Work with your financial statement auditor to see the amount of support they would like to have for this determination.&nbsp;&nbsp;<\/p>\n\n\n\n<div style=\"height:30px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<p class=\"wp-block-paragraph\"><strong>8. California has chosen not to conform and require capitalization, which impacts the provision and tax payment of taxpayers in California. How does state-by-state conformity, or lack thereof, impact the provision and tax payments?&nbsp;<\/strong>&nbsp;<\/p>\n\n\n\n<div style=\"height:15px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<p class=\"wp-block-paragraph\"><strong>Hogan Humphries<\/strong>: Taxpayers should be conducting a state-by-state analysis of their situation to determine the impact for each state on their overall provision and estimated payment situation.&nbsp;&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><strong>Jamie Overberg:<\/strong> If a state does conform to federal \u00a7174 law, then that state will be capitalizing more \u00a7174 expenses and will be more taxable. For those states like California, who do not conform, taxpayers will be taxed similar to prior years and will see not see the additional taxable income due to this issue.&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">On a state-by-state basis, taxpayers in conforming states, may be subject to more taxation and will need to make additional quarterly payment amounts. For taxpayers in loss situations in conforming states \u2014 they will have tax payments due where they might never have been taxable before. In other words, taxpayers could be paying state taxes in a state where they would not have had to if the state conforms to the current federal rules of capitalizing \u00a7174 costs.&nbsp;&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">This is a two-step process to account for nonconformance. A business must evaluate their state\u2019s overall impact relative to federal liability and then, determine which states might require quarterly payments. Businesses can check into state conformity issues themselves or ask their tax provider.&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">If a state chooses not to conform, then then the taxpayers in those states will, all other things being equal, be taxed similar to prior years and no change to payments and taxpayers will not have to make any further payments.&nbsp;&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><strong>Jonathan Forman<\/strong>: Separate calculations must be done for state purposes. This is similar to research credits where certain states (e.g., TX, CT) don\u2019t conform to federal guidelines, and require separate calculations.&nbsp;<\/p>\n\n\n\n<div style=\"height:51px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<p class=\"wp-block-paragraph\">* Hogan Humphries of KPMG has been working with companies to identify and substantiate research and development (R&amp;D) tax credits since 2008. For the first 13 years of his career, he was involved in project management and then transitioned to KPMG Washington National Tax about a year ago. Now he assists KPMG\u2019s field teams with their work, perform reviews, and assist with training.&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">With over 20 years of R&amp;D credit experience, Jamie Overberg specializes in executing and managing all aspects of the R&amp;D tax credit as well as a wide range of tax minimization strategies and financial reporting requirements under ASC 730, ASC 740, and Fin 48.&nbsp;&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Lawrence (Larry) A. Sannicandro, a partner at McCarter &amp; English, LLP, focuses his practice on federal and state tax controversies, including representation in audits, administrative appeals, collection matters, summons proceedings, criminal tax investigations and prosecutions, and litigation in the U.S. Tax Court, federal district and appellate courts, and state tax tribunals.&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">As managing director of Global Tax Management\u2019s R&amp;D Tax Credit Services practice, Jonathan Forman leads the development and delivery of services that help large and multinational corporations take advantage of available federal, state, and international R&amp;D tax incentives to reduce their tax liability. Jonathan has been involved with R&amp;D for more than 20 years in both technical and taxation capacities, bringing a scientific, IT, and business background to GTM\u2019s R&amp;D Tax Credit practice.&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">This article may be cited as Hogan Humphries, Jamie Overberg, Lawrence Sannicandro, and Jonathan Forman, Answers to Your Burning R&amp;E Expenditure and R&amp;D Tax Credit Questions, 63 Tax Mgmt. Memo. No. 16 (Aug. 1, 2022).&nbsp;<\/p>\n\n\n\n<div style=\"height:50px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<div class=\"wp-block-buttons is-layout-flex wp-block-buttons-is-layout-flex\">\n<div class=\"wp-block-button\"><a class=\"wp-block-button__link wp-element-button\" href=\"https:\/\/taxops.com\/contact\/\" target=\"_blank\" rel=\"noreferrer noopener\">Let&#8217;s Talk Tax<\/a><\/div>\n<\/div>\n\n\n\n<div style=\"height:47px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h3 class=\"wp-block-heading\">More Tax News<\/h3>\n\n\n<ul class=\"wp-block-latest-posts__list wp-block-latest-posts\"><li><a class=\"wp-block-latest-posts__post-title\" href=\"https:\/\/taxops.com\/auditor-independence-in-the-age-of-private-equity\/\">Auditor Independence in the Age of Private Equity: What CFOs Need to Know<\/a><\/li>\n<li><a class=\"wp-block-latest-posts__post-title\" href=\"https:\/\/taxops.com\/r-d-credits-for-software-companies\/\">R&amp;D Credits for Software Companies: Scrum Teams, Qualifiers, and Section 174 After OBBBA<\/a><\/li>\n<li><a class=\"wp-block-latest-posts__post-title\" href=\"https:\/\/taxops.com\/section-174-decoupling-what-tax-pros-need-to-know-state-by-state\/\">Section 174 Decoupling: What Tax Pros Need To Know State By State<\/a><\/li>\n<li><a class=\"wp-block-latest-posts__post-title\" href=\"https:\/\/taxops.com\/sean-espy-new-partner\/\">TaxOps Welcomes Sean Espy as Partner, Tax Minimization<\/a><\/li>\n<li><a class=\"wp-block-latest-posts__post-title\" href=\"https:\/\/taxops.com\/state-nexus-demystified-navigating-tax-compliance-after-wayfair-episode-1-2\/\">Your Tax Footprint Is Probably Bigger Than You Think: What Finance Leaders Need to Know About State Nexus<\/a><\/li>\n<\/ul>\n\n\n<div style=\"height:47px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<div class=\"wp-block-buttons is-layout-flex wp-block-buttons-is-layout-flex\">\n<div class=\"wp-block-button\"><a class=\"wp-block-button__link wp-element-button\" href=\"https:\/\/taxops.com\/contact\/#subscribe\" target=\"_blank\" rel=\"noreferrer noopener\">Subscribe to Tax News<\/a><\/div>\n<\/div>\n\n\n\n<div style=\"height:47px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n","protected":false},"excerpt":{"rendered":"<p>Jamie Overberg, Partner at TaxOps Minimization, shares insights on R&amp;D expenses and credits with a panel of tax professionals for Bloomberg Tax.&nbsp;&nbsp; By Hogan Humphries, Jamie Overberg, Lawrence Sannicandro, and Jonathan Forman*&nbsp;&nbsp; KPMG LLP, TaxOps, McCarter &amp; English, LLP, GTM Tax&nbsp; Washington D.C., Golden, CO, New York, NY, Newark, NJ Reproduced with permission from Tax [&hellip;]<\/p>\n","protected":false},"author":3,"featured_media":10658,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_et_pb_use_builder":"off","_et_pb_old_content":"<!-- wp:spacer {\"height\":\"53px\"} -->\n<div style=\"height:53px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n<!-- \/wp:spacer -->\n\n<!-- wp:gallery {\"linkTo\":\"none\"} -->\n<figure class=\"wp-block-gallery has-nested-images columns-default is-cropped\"><!-- wp:image {\"id\":10182,\"sizeSlug\":\"large\",\"linkDestination\":\"none\"} -->\n<figure class=\"wp-block-image size-large\"><img src=\"https:\/\/taxops.com\/wp-content\/uploads\/2022\/04\/Texas-High-Court-Clarifies-Service-Receipt-Apportionment-1-1024x536.png\" alt=\"\" class=\"wp-image-10182\"\/><\/figure>\n<!-- \/wp:image --><\/figure>\n<!-- \/wp:gallery -->\n\n<!-- wp:spacer {\"height\":\"53px\"} -->\n<div style=\"height:53px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n<!-- \/wp:spacer -->\n\n<!-- wp:quote -->\n<blockquote class=\"wp-block-quote\"><p><em><em>The Texas Supreme Court has ruled in favor of apportioning service receipts to the location of personnel or equipment, a position providing clarity to taxpayers on whether to source receipts from services performed versus where customers are at.<\/em>&nbsp;<\/em><\/p><\/blockquote>\n<!-- \/wp:quote -->\n\n<!-- wp:quote -->\n<blockquote class=\"wp-block-quote\"><p><\/p><\/blockquote>\n<!-- \/wp:quote -->\n\n<!-- wp:paragraph -->\n<p>By <a href=\"https:\/\/taxops.com\/tram-le\/\" target=\"_blank\" rel=\"noreferrer noopener\" title=\"Tram Le\">Tram Le<\/a> <\/p>\n<!-- \/wp:paragraph -->\n\n<!-- wp:paragraph -->\n<p>On March 25, 2022, the Texas Supreme Court held in favor of the taxpayer that services revenue is apportioned to the location where services are performed, consistent with Texas law.<sup>1<\/sup> The Court found that the performance of service is located where the taxpayer\u2019s personnel or equipment is physically doing useful work for the customer.&nbsp;<\/p>\n<!-- \/wp:paragraph -->\n\n<!-- wp:paragraph -->\n<p>The case involves Sirius XM (Sirius XM Radio, Inc. v. Hegar, Tx. Sup. Ct. No. 20-0462 (3\/25\/22)), whose headquarters, transmission equipment and production studios used in providing a subscription-based satellite radio service are largely located outside of Texas. In the 2010 and 2011 tax years, Sirius XM apportioned tax based on costs of activities in Texas and outside of Texas. Under Texas rules, service revenue is apportioned to Texas based on the \u201cfair value of the services\u201d rendered in Texas where services are performed in more than one state.<sup>2<\/sup>&nbsp;<\/p>\n<!-- \/wp:paragraph -->\n\n<!-- wp:paragraph -->\n<p>For those tax years, the Texas Comptroller adjusted on audit to base the tax on the percentage of Sirius XM\u2019s Texas subscribers. The Comptroller argued that service revenue is sourced to Texas if the \u201creceipt-producing, end-product act\u201d takes place in Texas. In this case, such an act was considered the decryption of the satellite network and enabling of each subscriber\u2019s radio to receive Sirius XM\u2019s signal. However, Sirius XM argued that its services \u2013 the production and broadcasting of radio content \u2013 was mainly performed outside of Texas.&nbsp;<\/p>\n<!-- \/wp:paragraph -->\n\n<!-- wp:paragraph -->\n<p>The Texas Supreme Court ultimately agreed that Sirius XM was providing satellite radio content and those services are performed in Texas if the labor employed in that service is doing the work in Texas. This constitues a natural reading of the law, which requires taxes due \u201cwhere service [is] performed in this state.\u201d This rejects the Comptroller premise of service taking place at the customer location. The Court also rejected the use of the \u201creceipt-producing, end-product\u201d test to determine where a service is being performed.&nbsp;<\/p>\n<!-- \/wp:paragraph -->\n\n<!-- wp:paragraph -->\n<p>Although the Court ruled in favor of the taxpayer, the case was remanded to the Appellate court for further review of Sirius XM\u2019s cost of performing services and evidence to support its \u201cfair value of services\u201d performed in Texas.&nbsp;&nbsp;<\/p>\n<!-- \/wp:paragraph -->\n\n<!-- wp:paragraph -->\n<p>The Texas Supreme Court opinion provides clarification in apportioning service revenue in Texas and determining whether services are performed in the state. Taxpayers doing business in Texas should carefully review business operations, nature of services, i.e., properly characterizing the services provided to customers and location of equipment, facilities, and personnel to properly apportion revenue.&nbsp;&nbsp;&nbsp;<\/p>\n<!-- \/wp:paragraph -->\n\n<!-- wp:paragraph -->\n<p>In addition, if services are being performed in Texas and outside of Texas, taxpayers must properly evaluate methods of determining the fair value of services and maintain sufficient evidence to support what revenue is apportioned to Texas. Contact a TaxOps advisor is you need assistance assessing nexus and taxability in the state of Texas and everywhere you do business.&nbsp;<\/p>\n<!-- \/wp:paragraph -->\n\n<!-- wp:paragraph -->\n<p>Tram Le is a member of the SALTovation team at TaxOps and an adjunct professor at the University of Texas at Arlington. She writes about hot topics in state and local tax affecting business operations and growth strategies and the Spreading SALTovation column for Tax Notes.&nbsp;Reach out to Tram at <a href=\"mailto:tle@taxops.com\" target=\"_blank\" rel=\"noreferrer noopener\" title=\"Tram Le\">tle@taxops.com<\/a>.&nbsp;&nbsp;<\/p>\n<!-- \/wp:paragraph -->\n\n<!-- wp:spacer {\"height\":\"53px\"} -->\n<div style=\"height:53px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n<!-- \/wp:spacer -->\n\n<!-- wp:buttons -->\n<div class=\"wp-block-buttons\"><!-- wp:button -->\n<div class=\"wp-block-button\"><a class=\"wp-block-button__link\" href=\"https:\/\/taxops.com\/contact\/\" target=\"_blank\" rel=\"noreferrer noopener\">Let's Talk Tax<\/a><\/div>\n<!-- \/wp:button --><\/div>\n<!-- \/wp:buttons -->\n\n<!-- wp:spacer {\"height\":\"47px\"} -->\n<div style=\"height:47px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n<!-- \/wp:spacer -->\n\n<!-- wp:heading {\"level\":3} -->\n<h3>More Tax News<\/h3>\n<!-- \/wp:heading -->\n\n<!-- wp:latest-posts \/-->\n\n<!-- wp:spacer {\"height\":\"47px\"} -->\n<div style=\"height:47px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n<!-- \/wp:spacer -->\n\n<!-- wp:buttons -->\n<div class=\"wp-block-buttons\"><!-- wp:button -->\n<div class=\"wp-block-button\"><a class=\"wp-block-button__link\" href=\"https:\/\/taxops.com\/contact\/#subscribe\" target=\"_blank\" rel=\"noreferrer noopener\">Subscribe to Tax News<\/a><\/div>\n<!-- \/wp:button --><\/div>\n<!-- \/wp:buttons -->\n\n<!-- wp:spacer {\"height\":\"47px\"} -->\n<div style=\"height:47px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n<!-- \/wp:spacer -->","_et_gb_content_width":"","spt_transcript":"","footnotes":""},"categories":[229,226],"tags":[252,284,126,998,265,48,30,101,52,80],"class_list":["post-10653","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-state-and-local","category-tax-news","tag-accountant","tag-cfo","tag-cpa","tag-faqs","tag-finance-professional","tag-rd","tag-state-and-local-tax","tag-state-tax","tag-tax-credit","tag-tax-provider"],"aioseo_notices":[],"jetpack_featured_media_url":"https:\/\/taxops.com\/wp-content\/uploads\/2022\/07\/Answers-to-Your-Burning-RE-Expenditure-and-RD-Tax-Credit-Questions-1.png","_links":{"self":[{"href":"https:\/\/taxops.com\/wp-json\/wp\/v2\/posts\/10653","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/taxops.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/taxops.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/taxops.com\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/taxops.com\/wp-json\/wp\/v2\/comments?post=10653"}],"version-history":[{"count":5,"href":"https:\/\/taxops.com\/wp-json\/wp\/v2\/posts\/10653\/revisions"}],"predecessor-version":[{"id":11253,"href":"https:\/\/taxops.com\/wp-json\/wp\/v2\/posts\/10653\/revisions\/11253"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/taxops.com\/wp-json\/wp\/v2\/media\/10658"}],"wp:attachment":[{"href":"https:\/\/taxops.com\/wp-json\/wp\/v2\/media?parent=10653"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/taxops.com\/wp-json\/wp\/v2\/categories?post=10653"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/taxops.com\/wp-json\/wp\/v2\/tags?post=10653"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}