MSCI, Allies Urge U.S. Treasury Department To Reform Practices Related To Key Tax Credit

The Metals Service Center Institute, the National Association of Manufacturers, and dozens of other organizations wrote to U.S. Treasury Secretary last week urging his department to reform the compliance processes, audit procedures, and regulations related to the Section 41 Research Tax Credit.

The letter, which is available at this link, argued the information reporting required for taxpayers to claim the research and development (R&D) credit has expanded far beyond the documentation that is produced in the ordinary course of business. “This increased burden has necessitated a variety of new systems solely to meet reporting obligations,” the letter said. “As such, manufacturers have been forced to structure their research enterprises according to the needs of the IRS rather than those which best support their research efforts. Manufacturing engineers and innovators are increasingly spending time explaining their work to their tax departments and the IRS, rather than focusing on driving innovation. Furthermore, when under audit, manufacturers face varying interpretations by different exam teams and confusion over what concerns the IRS has and how to address them …”

The letter also explained that the Internal Revenue Service also is increasingly classifying research expenses that occur in a manufacturing setting, such as on a manufacturing shop floor, as manufacturing expenses, a problem that denies manufacturers the benefits of the R&D credit for some vital research costs.

To address these problems, the letter advised the Treasury Department to:

• Reassess compliance and audit procedures to better balance taxpayer compliance burden and IRS risk assessment capabilities, including by working directly with taxpayers to develop a reporting framework that is administrable and informative.
• Evaluate regulations that prevent the qualification of manufacturing shop floor research and innovation.