Accounting
The Tax Court weighs risk and the R&D credit in two cases
If research is considered to be “funded research” within the meaning of Section 41(d)(4)(H), then it is not eligible for the research credit. Research is considered to be funded if payment is not contingent on the success of the research.
Two recent cases before the Tax Court — Systems Technologies Inc. and Smith, et al. — flesh out the meaning of funded research by turning to local law in their analysis of whether the research was funded or not.
In both cases, the Tax Court denied the Internal Revenue Service’s motion for summary judgment.
System Technologies, located in Indiana, engineers and manufactures industrial finishing systems, primarily for use in the automotive industry. The purchase agreements for these systems generally require payments as the projects are underway. Those agreements are also subject to a choice-of-law provision requiring that they be construed under and governed by Indiana law.
The Tax Court said that Indiana law would require Systems Technologies to refund payments to a customer “if Systems Technologies fails to deliver the product. Accordingly, ultimate payment to Systems Technologies is contingent on the success of the research and is not funded,” the court found. Therefore the motion for partial summary judgment was denied.
In the Smith case, Adrian Smith, Carlisle Gill, and Robert Forest were shareholders of Adrian Smith + Gordon Gill Architecture LLP, a company that provides innovative architectural design services to clients worldwide. AS+GG claimed research credits based on a number of projects for tax years 2008, 2009 and 2010 of roughly $3,000,000, $550,000 and $500,000, respectively. The projects included several buildings that were, at the time of their design, intended to be the tallest in the world. Of the research projects at issue, each contract contained choice-of-law provisions that supported their contention that the funding exclusion did not apply to the research projects.
To determine whether the research is funded, Reg. Section 1.41-4A(d) provides that amounts payable under any agreement that are contingent on the success of the research are not treated as funded. In such circumstances the party performing the research is entitled to the credit because it bears the risk of failure. The regulations also provide that a taxpayer is entitled to the credit only if it “retains substantial rights in the research.”
“The taxpayer argued that the contracts were each incorporated under the laws of various foreign countries such as Dubai, Saudi Arabia, and the U.K., so the governing foreign laws in those countries is relevant in the court’s funding analysis,” said Dean Zerbe, national managing director at Alliant and former senior counsel to the Senate Finance Committee.
“We find [taxpayer’s] arguments to be somewhat compelling with respect to the rights retained under the [Masdar HQ] agreement and [the IRS] does not rebut these arguments in its reply. Accordingly, we do not find summary judgment … to be appropriate to whether AS+GG performed funded research related to the Masdar HQ project,” the Court stated, denying summary judgment regarding one of the projects.
“Ultmately, the decisions in Smith, et al. and System Technologies, Inc. are a positive result for taxpayers going forward, with the
Tax Court continuing to give significant weight to the choice of law provisions within contracts,” said Zerbe. “Contractual funding analysis has now been shifted back towards a traditional contract analysis.”
Sarah Pabst/Photographer: Sarah Pabst/Bloomb
Treasury Secretary Scott Bessent said Republicans are looking at all options to help pay for President Donald Trump’s campaign promises on tax cuts, including increasing levies on the wealthiest Americans.
“We’re going to see where the president is” on the issue, Bessent said in an interview during a trip to Argentina Monday. “Everything’s on the table.”
Bessent said he and his counterparts in the administration and on Capitol Hill are working toward a “refinement portion” of legislation that would extend and potentially expand Trump’s 2017 tax cuts — many of which are set to expire at year-end.
“We’ve got broad agreement and we’re going to go from there,” Bessent said at the US ambassador’s residence in Buenos Aires.
Bloomberg reported earlier this month that Republicans were weighing the creation of a new bracket for those earning
Bessent has said that he is working to expand the 2017 cuts to include no taxes on tipped wages and overtime pay, and a new benefit for Social Security recipients. He also said he wants to give people the ability to deduct the interest payments on their auto loans.
The Treasury chief was visiting Argentina to show support for the country after it received a new round of IMF funding last week. He earlier announced that the US would start trade negotiations with the country, after meeting with President Javier Milei and Economic Minister Luis Caputo.
There are a great accounting firms of all sizes all over the country, but if you had to pick a capital for the profession, it would probably have to be New York City.
Of all the states in the country, New York hosts the headquarters of the most
Two-fifths of the state in the union host no large-firm headquarters — but that’s not to say those states don’t have representation. The Big Four firms have offices all across the country, as do many of the 12 other firms with over
A majority of Americans don’t know that their taxes are about to increase.
According to Cato Institute’s
The TCJA was passed by a 51 to 49 Senate vote on Dec. 2, 2017, and signed into law by President Donald Trump during his first term on Jan. 1, 2018. The overhaul to the Tax Code decreased the tax rate for five of the seven individual income tax brackets, raised the standard deduction, suspended the personal exemption, removed a mandate requiring individuals to purchase health insurance under a provision of the Affordable Care Act, and raised the child tax credit and created a nonrefundable credit for non-child dependents, among other things.
Mike Theiler/Bloomberg
Part of the unawareness surrounding the expiring tax cuts is simply due to familiarity. Only 9% of people are very familiar with the TCJA, 28% say they know a moderate amount about it and 34% say they know nothing.
When respondents learned that the TCJA will expire, 53% said that Congress should either make the cuts permanent (36%) or extend them temporarily (17%). Only 13% said they wanted Congress to let the tax cuts expire, and 34% didn’t know enough to say.
Respondents’ support for extending the tax cuts increased when they learned that the average person’s taxes will increase between $1,000 and $2,000 a year — 57% said to make the tax cuts permanent, and 28% said to extend them temporarily.
Eight in 10 respondents say they worry they cannot afford to pay higher taxes next year. But only 45% expect their personal tax bill to increase, while 5% expect it to decrease and 23% think it will stay the same. Twenty-six percent don’t know what will happen.
Respondents were split on whether they thought the U.S. can afford the tax cuts: 45% said the U.S. can afford to make the TCJA permanent, 21% said the country cannot afford to do so and 34% said they don’t know.
However, 51% felt their taxes were handled fairly, while roughly half of respondents think their taxes are too high (55%) and believe their tax bill exceeds their fair share (55%).
The Cato Institute is a libertarian public policy think tank based in Washington, D.C. It surveyed 2,000 Americans from March 20 -26 for the report, in collaboration with YouGov.
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