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LB&I directive: Research credit for increasing research activities section 41

Research credit for increasing research activities

The IRS Large Business & International (LB&I) division today announced the release of a September 11, 2017 directive as guidance for IRS examiners regarding taxpayer claims for the research credit for increasing research activities under section 41.


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LB&I directive

According to the LB&I directive, if a taxpayer complies with the certification requirements contained within this directive:

  • LB&I examiners will not challenge qualified research expenses (QREs) that are the adjusted ASC 730 financial statement R&D costs for the credit year. The adjusted ASC 730 financial statement R&D must be computed in accordance with both the method reflected in an appendix and the “definitions” section of the directive. 
  • Any additional amounts of QREs claimed by the taxpayer on Form 6765 for the credit year over the adjusted ASC 730 financial statement R&D amount will be subject to risk assessment to determine the scope of an examination, if warranted.

The directive is identified as: Guidance for Allowance of the Credit for Increasing Research Activities under I.R.C §41 for Taxpayers that Expense Research and Development Costs on their Financial Statements pursuant to ASC 730, LB&I-04-0917-005 (September 11, 2017)


Read a related IRS release—IR-2017-158 (September 22, 2017)


For purposes of this release:

  • The directive applies only to original returns that are timely filed (including extensions) on or after the date of the directive for LB&I taxpayers who choose to follow the terms of this directive.
  • The directive is intended to provide an efficient manner of determining QREs for LB&I taxpayers that meet the requirements of the directive, for efficient management of LB&I audit resources.
  • The directive provides an administrative solution to accept as sufficient evidence of QREs the “adjusted ASC 730 financial statement R&D” for the credit year—meaning the research and development costs currently expensed on a taxpayer’s certified audited financial statements pursuant to ASC 730 for U.S. GAAP purposes (ASC 730 Financial Statement R&D) and includes certain specified adjustments made to ASC 730 Financial Statement R&D.
  • The directive only applies to LB&I taxpayers (those with assets equal to or greater than $10 million) that follow U.S. GAAP to prepare their certified audited financial statements and that show as a separate line item on the income statement included in their certified audited financial statements (or in a separately stated note) the amount of the currently expensed ASC 730 Financial Statement R&D.

KPMG observation

This directive is being viewed by tax professionals as a welcomed development because it may lead to significant efficiencies for taxpayers, practitioners, and the IRS. An initial review of the directive reveals that among the notable measures are the following:

  • Although the directive requires, inter alia, that a taxpayer follow U.S. GAAP to prepare certified audited financial statements and expense R&D costs on the financial statements pursuant to ASC 730, it is available regardless of the taxpayer’s industry.  
  • Although there is a minimum threshold for application (i.e., assets equal to or greater than $10 million), there is no maximum.  
  • Taxpayers that meet the standards described in the directive may take advantage of it, but are not required to apply it. 

KPMG’s Research Credit Services team

KPMG’s Research Credit Services (RCS) team has extensive experience with the R&D tax credit and can assist with the R&D credit claims process and in meeting the requirements of this new LB&I directive. For more information, contact any of the individuals listed below:

Adam Boyar Los Angeles +1 213 955 8332
Richard Marcos San Diego  +1 213 817 3188
Joel Schultz Minneapolis +1 612 305 5093
Chris Kachinsky New York +1 212 872 2187
Greg Bocchino New York +1 212 872 6876
Matt Yokitis Pittsburgh +1 412 232 1605
Pete Beale Philadelphia +1 267 256 3370
Michael Fishman Dallas +1 214 840 6966
Stacey Mirelez Dallas +1 214 840 6034
Tyrone Montague Washington National Tax +1 212 954 6818
Jaime Park Washington National Tax +1 703 629 8921



Mike Brossmer West Coast leader +1 408 367 4127
Ed Jankun East Coast leader +1 704 371 8090



Yingying Qian New England and Upstate New York + 1 617 988 1356
Stephanie Humphrey New York Metro +1 212 872 2161
Stephen Borman New York Metro +1 212 954 6855
Todd Mazzeo New York Metro +1 212 872 3846
Michael Lapham Pennsylvania +1 267 256 1805
Heather Rice Chesapeake Bay +1 804 782 4228
Ed Jankun South East +1 704 371 8090
Vince Ceccacci Dallas / Denver +1 214 840 2375
Keith Jordan Houston +1 713 319 2519
Amol Gavankar Chicago +1 312 665 3364
Jason Mollner Chicago +1 312 665 1528
Michael Mehanna Pacific South West +1 213 955 8510
David Edick Mid - America +1 614 249 2345
Tom Mahler Pacific North West +1 503 820 6562
Deborah Heard San Francisco Bay +1 408 367 2865



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