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Today the Treasury Department and the IRS issued final regulations for the research credit. These regulations provide rules for determining which research activities are eligible for the credit. The Treasury Department and the IRS also issued a notice requesting additional comments on the proposed rules for internal-use software.
“These regulations are an important step towards resolving the uncertainty that has surrounded the research credit. They provide clearer rules to make it less burdensome for taxpayers to claim the credit and easier for the IRS to administer,” stated Treasury Assistant Secretary for Tax Policy Pam Olson. “At the same time, the regulations are flexible enough to address the wide range of research activities being conducted in the U.S. today. They will help ensure that the credit continues to serve its purpose of supporting research conducted in the U.S.”
The regulations issued today replace regulations that were issued in January 2001. Shortly after the January 2001 regulations were issued, the Treasury Department and the IRS began a review of those regulations and solicited additional public comments. Consistent with the regulations proposed in December 2001, today's final regulations reflect significant changes to the provisions relating to the statutory requirement that qualifying research be “undertaken for the purpose of discovering information which is technological in nature.” In addition, the regulations provide additional guidance regarding the statutory requirement that qualifying research constitute a “process of experimentation.”
Treasury and IRS did not finalize today the rules relating to software that is developed by a taxpayer primarily for the taxpayer's internal use, often referred to as internal-use software. To qualify for the research credit, internal-use software must satisfy additional requirements. Since 1997, the Treasury Department and the IRS have issued a series of proposed and final regulations addressing both the definition of internal-use software and the additional qualification requirements for internal-use software. The Treasury Department and the IRS have concluded that additional public comments would be useful before the internal-use software rules are finalized. Consequently, the Treasury Department and the IRS are requesting additional public comments to ensure that final rules address comprehensively all issues raised by internal-use software.
“The world has changed significantly since the statutory provision for internal-use software was enacted in 1986,” Assistant Secretary Olson continued. “A number of important issues still must be resolved before we can issue final regulations that both carry out the statute's purpose and provide clear and meaningful rules for software development today. Although our goal was to finalize regulations for all aspects of the research credit this year, it is more important for us to have the rules right. Consequently, we are requesting further input from the public on internal-use software before we move forward.”
The public is invited to submit comments concerning a definition of internal-use software that appropriately reflects the statute and legislative history, can be readily applied by taxpayers and readily administered by the IRS, and is flexible enough to provide continuing application into the future. The notice states that while the Treasury Department and the IRS are considering these comments, taxpayers may rely on either the final regulations issued in January 2001 or the proposed regulations issued in December 2001 for rules for internal-use software. The Notice requests commentators to address whether final regulations for internal-use software should have any retroactive effect.
The Treasury Department and the IRS believe that today's guidance on the research credit will facilitate the resolution of a number of contentious issues that have consumed considerable taxpayer and IRS resources. The Treasury and the IRS expect that the final regulations will provide taxpayers and the IRS an opportunity to resolve disputes over the research credit in a timely manner. This will allow the IRS to devote compliance resources to more productive areas.
The texts of the final regulations and the advanced notice of proposed rulemaking are attached. They will be published in the Federal Register in the next few days and are subject to minor technical changes.
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