HOUSTON, Sept. 19, 2013 /PRNewswire/ -- The U.S. Department of Treasury published new proposed regulations for the § 174 Research and Experimental Expenditure deduction ("R&E deduction"). The proposed regulations seek to clarify the application of the deduction to prototype costs and establish a "shrink-back" specific to the R&E deduction. These regulations, which are subject to notice and comment for ninety days, can be relied upon by current filers and taxpayers looking to amend their prior year returns.
Former Senior Counsel to the Senate Finance Committee and alliantgroup National Managing Director Dean Zerbe views this as a win for taxpayers and American manufacturers, but indicated that even more could be done to help small and medium sized businesses. Particularly, Zerbe highlighted the need to expand the application of the alternative simplified credit (ASC) on amended returns.
"Overall, this is a business-friendly change to one corner of the Treasury regulations on R&D. It is good to see positive movement from Treasury on R&D issues," Zerbe said. "But a huge number of small and medium businesses across the country are waiting for the big ball to drop – that Treasury will respond to the bipartisan chorus from Congress and change its regulations and allow businesses to take the alternative simplified credit (ASC) on amended returns. That would be a home run for jobs and businesses."
The proposed regulations would allow businesses to classify a prototype or pilot model as R&E expenses regardless of the ultimate use of the item. Under the proposed legislation, so long as the purpose of building the prototype or pilot model is to resolve uncertainty, it is irrelevant if the item is later sold or used by the taxpayer in its trade or business. This new position represents the further expansion of the 2009 Tax Court decision, T.G. Missouri Company v. Commissioner, as taxpayers building prototypes will benefit from the current deductibility of the pilot model, even if it is added to inventory.
Another major component of the proposed regulations establishes the so-called "shrink-back" rule for R&E expenditures. According to Shane Frank, Chief Operating Officer of alliantgroup, if determined that a portion of a prototype qualifies for the deduction, but not the entire item, that portion of the item is still deductible. According to Frank, the incorporation of the related § 41 Credit for Increasing Research Activities credit shrink-back rule preserves a portion of the R&E deduction.
The benefits of the R&E deduction however extend beyond mechanical manufacturers. Zerbe notes that many qualifying small and medium sized companies, particularly those in the food processing and agricultural industries, are not taking advantage of the R&D tax credit and in many instances self-censor believing the credit does not apply to their business. In reality, this could not be further from the truth, and Zerbe highlights that Treasury has singled out grape crushing and wine production as qualifying activities.
"Who knew that wine lovers could celebrate a Treasury regulation," Zerbe said. "My firm, alliantgroup, works with hundreds of food and beverage manufacturers every year to qualify for the R&D tax credit – but unfortunately there are thousands more in food processing who are still sitting on their hands. I raise my glass in thanks to Treasury for underscoring that wine and others in the food and beverage industry need to look at the R&D tax credit as a way of keeping more of their money to grow their businesses and create more jobs."
Shane T. Frank serves as head of alliantgroup's National Operations and Tax Controversy practice. Shane is a Senior Managing Director and President/Chief Operating Officer of alliantgroup. Prior to founding alliantgroup, Shane was a partner of a prominent corporate law firm, where he served as lead counsel for the firm's corporate practice. His experience includes representation of numerous Fortune 500 companies.
Dean A. Zerbe is National Managing Director for alliantgroup and former Senior Tax Counsel for the U.S. Senate Finance Committee. Dean monitors and helps to influence tax-related legislative activity in Washington, D.C. During his tenure as a Senate senior advisor, Dean was intimately involved with almost every major piece of tax legislation.
alliantgroup is the nation's premier provider of specialty tax services. Headquartered in Houston, TX, with offices across the country including California, New York, Illinois, and Washington, D.C., alliantgroup works with CPAs and their clients to ensure that they receive the full benefits of all available federal and state government-sponsored tax credit and incentive programs. For more information, please visit www.alliantgroup.com.