The research credit under IRC Section 41 remains one of the most complex provisions in the tax code, particularly regarding the “substantially all” rule for the process of experimentation. This rule requires that 80% or more of research activities for a business component constitute elements of a process of experimentation. While taxpayers have historically used this rule to maximize qualified research expenditures (QREs), the IRS has recently used it to disallow QREs and research credit claims.
In their comprehensive analysis for Tax Notes, Grant Thornton Senior Manager John Andress, Senior Manager Dennis St. Martin, Managing Director Monica Bambury and Managing Director Kevin Benton examine the evolution of the “substantially all” rule, looking at key court cases, and outlining practical considerations for businesses. In their article titled, “Examining the ‘Substantially All’ Rule for the Research Credit,” they demonstrate their deep technical knowledge and hands-on experience helping organizations navigate research credit claims across various industries.
As they describe, recent case law, including the Tax Court's decision in Intermountain Electronics v. Commissioner, illustrates how the IRS is increasingly scrutinizing research credit claims through the lens of the “substantially all” rule. Understanding how to properly apply the “substantially all” rule and the related shrinking-back rule is essential for businesses aiming to maximize their research credits while minimizing compliance risks.
Read the full article to gain valuable insights into defining business components, evaluating research activities, and analyzing computational methods that can help substantiate your research credit claims in an increasingly scrutinized environment.
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