Certain Non-Qualified Research Activities Are Eligible for Research Credit, According to IRS Technical Advice Memorandum
Businesses can benefit from the business credit for increasing research activities, even if the research activities were performed for both qualified and non-qualified purposes under Internal Revenue Code (IRC) section 41(d)(3), according to a recent released technical advice memorandum (TAM) (202327015), issued by the Internal Revenue Service (IRS).
Section 41 provides a research credit to businesses that includes 20% of the excess (if any) of their qualified research expenses over a base amount. Qualified research must, in part, be:
- research undertaken for the purpose of discovering information and the application of which is intended to be useful in the development of a new or improved business component; and
- experimentation research activities conducted for a new or improved function, performance, reliability or quality (i.e. the experimentation test).
However, the statute explicitly excludes from the definition of qualified purposes research related to style, taste, cosmetic or seasonal design factors.
In the present case, the Internal Revenue Service (IRS) initially disallowed a taxpayer's claimed research credits for a business component, in part, because all of the taxpayer's development activities for the business component were considered non-qualified activities undertaken for purposes of style, taste, cosmetics or season design factors.
However, the IRS Independent Office of Appeals concluded that the mere fact that a taxpayer engaged in non-qualified purpose activities with respect to the business component does not preclude the taxpayer from satisfying the experimentation test, provided that substantially all of the activities for business component constitute elements of a process of experimentation.
Note: The IRS will occasionally release a TAM, which is drawn up by the IRS Office of Chief Counsel in the Washington National Office to answer a technical or procedural question posed by an IRS director or an area director. These TAMs are similar to Private Letter Rulings (PLRs) in that they are provided to the public to help guide and advise tax practitioners on applicable rules and procedures through the eyes of the IRS. Like PLRs, TAMs should not be used or cited as precedent.