Few provisions in federal tax generate as much scrutiny and controversy as the research and development tax credit under IRC Section 41. While this credit represents a significant opportunity for companies to reduce their tax burden on qualified research activities, it has also become one of the most heavily audited areas by the IRS, with every dollar of enforcement yielding an estimated $2.64 reduction in research credits through examination. At the heart of this enforcement battle lies an uncodified but increasingly critical concept that has emerged from decades of IRS practice and court decisions: the nexus requirement.
In an article for Tax Notes, Senior Associate Mary Zimmer, Senior Manager Andrea Shapiro, Senior Manager Ami Norton and Managing Director Kevin Benton, explore the ramifications of the nexus requirement in an article titled, “Embracing the Nexus Concept for the Research Credit.” As the article discusses, the nexus concept has become the IRS's primary tool in challenging research credit claims, requiring taxpayers to demonstrate a clear connection between their qualified research activities and expenditures and the specific business components being developed.
As companies navigate this challenging landscape, understanding how to strategically document and defend the nexus between research activities and business components has become essential for maintaining research credit claims under audit. This comprehensive analysis by Grant Thornton advisors provides crucial insights into the historical development of the nexus concept, key court decisions that have shaped its application, and practical strategies for building defensible research credit positions.
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