The IRS Large Business & International (LB&I)
division released a directive (LB&I-04-1212-014) providing
research and development (R&D) tax credit examination guidance
for taxpayers involved in developing new pharmaceutical drugs and
therapeutic biologics.
The directive instructs examiners not to challenge certain qualified research expenses (QREs) claimed by pharmaceutical companies if taxpayers under exam provide a certification statement to the IRS. While the directive is not an official pronouncement of law and cannot be used, cited or relied on, it provides an accurate explanation of the IRS's examination position on the issue.
The directive outlines the general pharmaceutical drug development process as including the following four stages:
- Discovery and preclinical stage
- Clinical trial stage
- Regulatory review stage
- Postapproval stage
The directive instructs that QREs incurred in stages 1 and 2 should not be challenged by examining agents as long as the requirements of Section 41 are otherwise met and the certification statement is submitted.
The certification statement requires taxpayers to segregate the amount of QREs incurred in stage 1 and 2 development, and requires taxpayers to agree to retain and readily provide underlying documentation upon request of the IRS. If the certification statement is submitted, examiners must receive approval from the territory manager before requesting the underlying documentation.
Since 2010, LB&I has been working with practitioners in an effort to eliminate some of the controversy between the IRS and taxpayers regarding the R&D credit, especially for activities considered "core research." This directive provides taxpayers in the pharmaceutical industry with more flexibility for R&D credits claimed related to core research activities. LB&I is expected to issue similar directives for other industries.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
