A decision issued in Eric G. Suder, et al. v. Commissioner was favorable for businesses utilizing the Credit for Increasing Research Activities (R&D tax credit). For those unfamiliar with the R &D credit, it is tax credit for research expenditures. The recent case helped defined the scope of the term research expenditures, for the court ruled that company’s do not need to “reinvent the wheel” to claim the R&D tax credit.
The Argument of IRS
The IRS held that ESI—the company of plaintiff Eric G. Suder—did not attempt to solve any uncertainty or develop any of its products or designs with the research they wrote off for the R&D tax credit. The IRS also argued that ESI’s projects were based on existing knowledge already known by the company. An expert witness testified that there were no technical challenges facing the ESI’s projects, and that the research dealt with nothing more than inquiry into low-cost versions of products already on the market.
The Courts Rebuttal
The court disagreed completely with the IRS. They held that no business needs to “reinvent the wheel” with their research in order to be eligible for the R&D tax credit. Moreover, the uncertainty requirement stipulated by the bill may be satisfied even if the business knows the technical possibility of that goal, but is unsure of the optimal method for achieving it. Thirdly, research expenditures for such knowledge already existing in the form of manuals or online references still can merit an R&D tax credit.
Basically, the decision allows for a broader interpretation of what can be claimed as an R&D credit. It is not the case that an R&D tax credit requires research into a completely novel entity. The recent court decisions shows that research into efficiency can also be claimed using the tax credit.