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January 2013 WWW.BDO.COM
AN ALERT FROM THE BDO Technology & Life Sciences Practice
BDO knows: Technology & Life Sciences SUBJECT
Contact:
IRS Releases Taxpayer-Friendly Guidance for Examinations of Pharma R&D Credits
Tim Clackett Los Angeles 310-557-8201 / [email protected] Slade Fester San Jose 408-352-1951 / [email protected]
u DETAILS In December 2012, the IRS Large Business & International (“LB&I”) division issued a memorandum providing guidance for IRS agents auditing Internal Revenue Code (“IRC”) sec. 41 research credit claims for activities involved in developing pharmaceutical drugs and therapeutic biologics. Please see BDO Knows: Federal Tax Alert for information about the research credit’s recent extension and modification. The memorandum is not an official pronouncement of law and cannot be used, cited, or relied on as such. It does, however, provide taxpayers a helpful sense for the views of LB&I’s leadership. The memorandum instructs agents not to challenge a taxpayer’s reported qualified research expenses (“QREs”) if three criteria are met: 1. The QREs satisfy the criteria for “qualified research” as defined in IRC sec. 41(d)(1), including not being excluded by IRC sec. 41(d)(4); 2. The QREs are incurred during stages 1 or 2 of the Pharmaceutical Drug and Therapeutic Biologics Development Process and clinical trials required by the FDA relating to Accelerated Approvals—see below; and 3. Within either 30 days of the date an Information Document Request (“IDR”) is issued to the taxpayer with respect to the amount of QREs claimed, or sixty days of the effective date of the memorandum’s Directive, the taxpayer furnishes a fully completed Certification Statement agreeing to support the audit process and verifying adherence to IRC sec. 41 in computing QREs. Please see below for the Certification Statement that appears in the memorandum. The statement must be signed by an individual who is authorized to execute the taxpayer’s Federal income tax return for the taxable year under audit, and must certify, under penalty of perjury, that for the taxable year under audit the taxpayer’s computation of QREs is consistent with IRC sec. 41. uRead more
Hank Galligan Boston 617-422-7521 / [email protected] Paul Heiselmann Chicago 312-233-1876 / [email protected] Aftab Jamil Silicon Valley 408-352-1999 / [email protected] Ryan Starkes Woodbridge 732-734-1011 / [email protected] Mike Whitacre South 404-688-6841 / [email protected] David Yasukochi Orange County 714-913-2597 / [email protected]
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BDO Technology & Life Sciences Practice Alert
Development Stages Following the IRS’s Pharmaceutical Industry Research Credit Audit Guidelines, the memorandum breaks down the Pharmaceutical Drugs and Therapeutic Biologics Development Process into four stages: 1. Discovery and Preclinical; 2. Clinical Trials; 3. Regulatory Review; and 4. Post Approval. And like the audit guidelines, the memorandum provides examiners a basis for spending less time looking at expenses incurred early in the development process.
Observations The impact of the memorandum on the examination process is beneficial to the taxpayer. LB&I examiners are advised not to challenge QREs that relate to “qualified research” performed in stages 1 and 2 of the Pharmaceutical Drugs and Therapeutic Biologics Development Process. As a result, taxpayers should expect the IRS to be more likely to spend less time examining expenses incurred during stages 1 and 2—and to allow a higher percentage of those expenses—than expenses incurred in stages 3 and 4. If you’re under exam by the IRS, consult with your examiner to see whether and which of your activities are eligible for treatment under the memorandum and, if so, complete the Certification Statement within the required timeframe. Please note: you will still need to be prepared to provide records to support the claim for QREs and qualified research pursuant to IRC sec. 6001. A separate Certification Statement must be submitted for each taxable year under audit. For a consolidated Federal income tax return, the common parent is regarded as the sole agent for the group, and it should sign the Certification Statement for each member of the group.
Certification Statement Taxpayer Name: Taxpayer EIN: Tax Year:
CERTIFICATION By signing this certification statement, the taxpayer agrees to readily provide (upon request of the IRS) all relevant data and records required under section 6001 of the Code to establish to the satisfaction of the IRS that the statements made in this certification statement are true, correct and complete. A) the taxpayer’s qualified research expenses (QREs) are computed in accordance with section 41(b) of the Code; B) in computing the QREs, the taxpayer excluded the activities listed in section 41(d)(4) of the Code; and C) in computing the section 41 credit, the taxpayer included the QREs relating to Stages 1 and 2 of the Pharmaceutical Drugs and Therapeutic Biologics Development Process and clinical trials required by the FDA relating to Accelerated Approvals in the amount of $ _________. I certify, under penalty of perjury, that I have examined this certification statement, and to the best of my knowledge and belief, it is true, correct, and complete. Signature: Date: Title:
For corporations, the certification must be signed by an individual authorized under IRC sec. 6062. u Read more
BDO Technology & Life Sciences Practice Alert
How BDO Can Help We can you help develop and implement a methodology to identify your QREs, calculate your credit, and assist with gathering and preparing documentation to support it that minimizes your time and cost while at the same time making sure all and only qualified costs are identified. Because tax examiners generally place more importance on existing documentation, we work to leverage your existing documentation and accounting systems to gather the information the examiners typically request. In addition, we marry this information to the stages of the development process outlined above to help examiners understand better how and why your activities and costs qualify. Implementing such a methodology will help position you to execute the Certification Statement provided for in LB&I’s memorandum, increasing the likelihood your exam produces better results more quickly.
If you have questions or would like to speak with someone regarding the implications and next steps for your organization, please feel free to contact Chris Bard, Practice Leader, Research & Development Specialized Tax Services at [email protected] or 310-557-7525.
BDO Technology & Life Sciences Practice BDO is a national professional services firm providing assurance, tax, financial advisory and consulting services to a wide range of publicly traded and privately held companies. Guided by core values including competence, honesty and integrity, professionalism, dedication, responsibility and accountability for 100 years, we have provided quality service and leadership through the active involvement of our most experienced and committed professionals. BDO works with a wide variety of technology clients, ranging from multinational Fortune 500 corporations to more entrepreneurial businesses, on myriad accounting, tax and other financial issues.
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About BDO USA BDO is the brand name for BDO USA, LLP, a U.S. professional services firm providing assurance, tax, financial advisory and consulting services to a wide range of publicly traded and privately held companies. For more than 100 years, BDO has provided quality service through the active involvement of experienced and committed professionals. The firm serves clients through more than 40 offices and over 400 independent alliance firm locations nationwide. As an independent Member Firm of BDO International Limited, BDO serves multinational clients through a global network of 1,204 offices in 138 countries. BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms. For more information, please visit: www.bdo.com. Material discussed is meant to provide general information and should not be acted on without professional advice tailored to your firm’s individual needs. To ensure compliance with Treasury Department regulations, we wish to inform you that any tax advice that may be contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or applicable state or local tax or (ii) promoting, marketing or recommending to another party any tax-related matters addressed herein. © 2013 BDO USA, LLP. All rights reserved.
AN ALERT FROM THE BDO Technology & Life Sciences Practice
BDO knows: Technology & Life Sciences SUBJECT
Contact:
IRS Releases Taxpayer-Friendly Guidance for Examinations of Pharma R&D Credits
Tim Clackett Los Angeles 310-557-8201 / [email protected] Slade Fester San Jose 408-352-1951 / [email protected]
u DETAILS In December 2012, the IRS Large Business & International (“LB&I”) division issued a memorandum providing guidance for IRS agents auditing Internal Revenue Code (“IRC”) sec. 41 research credit claims for activities involved in developing pharmaceutical drugs and therapeutic biologics. Please see BDO Knows: Federal Tax Alert for information about the research credit’s recent extension and modification. The memorandum is not an official pronouncement of law and cannot be used, cited, or relied on as such. It does, however, provide taxpayers a helpful sense for the views of LB&I’s leadership. The memorandum instructs agents not to challenge a taxpayer’s reported qualified research expenses (“QREs”) if three criteria are met: 1. The QREs satisfy the criteria for “qualified research” as defined in IRC sec. 41(d)(1), including not being excluded by IRC sec. 41(d)(4); 2. The QREs are incurred during stages 1 or 2 of the Pharmaceutical Drug and Therapeutic Biologics Development Process and clinical trials required by the FDA relating to Accelerated Approvals—see below; and 3. Within either 30 days of the date an Information Document Request (“IDR”) is issued to the taxpayer with respect to the amount of QREs claimed, or sixty days of the effective date of the memorandum’s Directive, the taxpayer furnishes a fully completed Certification Statement agreeing to support the audit process and verifying adherence to IRC sec. 41 in computing QREs. Please see below for the Certification Statement that appears in the memorandum. The statement must be signed by an individual who is authorized to execute the taxpayer’s Federal income tax return for the taxable year under audit, and must certify, under penalty of perjury, that for the taxable year under audit the taxpayer’s computation of QREs is consistent with IRC sec. 41. uRead more
Hank Galligan Boston 617-422-7521 / [email protected] Paul Heiselmann Chicago 312-233-1876 / [email protected] Aftab Jamil Silicon Valley 408-352-1999 / [email protected] Ryan Starkes Woodbridge 732-734-1011 / [email protected] Mike Whitacre South 404-688-6841 / [email protected] David Yasukochi Orange County 714-913-2597 / [email protected]
2
BDO Technology & Life Sciences Practice Alert
Development Stages Following the IRS’s Pharmaceutical Industry Research Credit Audit Guidelines, the memorandum breaks down the Pharmaceutical Drugs and Therapeutic Biologics Development Process into four stages: 1. Discovery and Preclinical; 2. Clinical Trials; 3. Regulatory Review; and 4. Post Approval. And like the audit guidelines, the memorandum provides examiners a basis for spending less time looking at expenses incurred early in the development process.
Observations The impact of the memorandum on the examination process is beneficial to the taxpayer. LB&I examiners are advised not to challenge QREs that relate to “qualified research” performed in stages 1 and 2 of the Pharmaceutical Drugs and Therapeutic Biologics Development Process. As a result, taxpayers should expect the IRS to be more likely to spend less time examining expenses incurred during stages 1 and 2—and to allow a higher percentage of those expenses—than expenses incurred in stages 3 and 4. If you’re under exam by the IRS, consult with your examiner to see whether and which of your activities are eligible for treatment under the memorandum and, if so, complete the Certification Statement within the required timeframe. Please note: you will still need to be prepared to provide records to support the claim for QREs and qualified research pursuant to IRC sec. 6001. A separate Certification Statement must be submitted for each taxable year under audit. For a consolidated Federal income tax return, the common parent is regarded as the sole agent for the group, and it should sign the Certification Statement for each member of the group.
Certification Statement Taxpayer Name: Taxpayer EIN: Tax Year:
CERTIFICATION By signing this certification statement, the taxpayer agrees to readily provide (upon request of the IRS) all relevant data and records required under section 6001 of the Code to establish to the satisfaction of the IRS that the statements made in this certification statement are true, correct and complete. A) the taxpayer’s qualified research expenses (QREs) are computed in accordance with section 41(b) of the Code; B) in computing the QREs, the taxpayer excluded the activities listed in section 41(d)(4) of the Code; and C) in computing the section 41 credit, the taxpayer included the QREs relating to Stages 1 and 2 of the Pharmaceutical Drugs and Therapeutic Biologics Development Process and clinical trials required by the FDA relating to Accelerated Approvals in the amount of $ _________. I certify, under penalty of perjury, that I have examined this certification statement, and to the best of my knowledge and belief, it is true, correct, and complete. Signature: Date: Title:
For corporations, the certification must be signed by an individual authorized under IRC sec. 6062. u Read more
BDO Technology & Life Sciences Practice Alert
How BDO Can Help We can you help develop and implement a methodology to identify your QREs, calculate your credit, and assist with gathering and preparing documentation to support it that minimizes your time and cost while at the same time making sure all and only qualified costs are identified. Because tax examiners generally place more importance on existing documentation, we work to leverage your existing documentation and accounting systems to gather the information the examiners typically request. In addition, we marry this information to the stages of the development process outlined above to help examiners understand better how and why your activities and costs qualify. Implementing such a methodology will help position you to execute the Certification Statement provided for in LB&I’s memorandum, increasing the likelihood your exam produces better results more quickly.
If you have questions or would like to speak with someone regarding the implications and next steps for your organization, please feel free to contact Chris Bard, Practice Leader, Research & Development Specialized Tax Services at [email protected] or 310-557-7525.
BDO Technology & Life Sciences Practice BDO is a national professional services firm providing assurance, tax, financial advisory and consulting services to a wide range of publicly traded and privately held companies. Guided by core values including competence, honesty and integrity, professionalism, dedication, responsibility and accountability for 100 years, we have provided quality service and leadership through the active involvement of our most experienced and committed professionals. BDO works with a wide variety of technology clients, ranging from multinational Fortune 500 corporations to more entrepreneurial businesses, on myriad accounting, tax and other financial issues.
3
About BDO USA BDO is the brand name for BDO USA, LLP, a U.S. professional services firm providing assurance, tax, financial advisory and consulting services to a wide range of publicly traded and privately held companies. For more than 100 years, BDO has provided quality service through the active involvement of experienced and committed professionals. The firm serves clients through more than 40 offices and over 400 independent alliance firm locations nationwide. As an independent Member Firm of BDO International Limited, BDO serves multinational clients through a global network of 1,204 offices in 138 countries. BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms. For more information, please visit: www.bdo.com. Material discussed is meant to provide general information and should not be acted on without professional advice tailored to your firm’s individual needs. To ensure compliance with Treasury Department regulations, we wish to inform you that any tax advice that may be contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or applicable state or local tax or (ii) promoting, marketing or recommending to another party any tax-related matters addressed herein. © 2013 BDO USA, LLP. All rights reserved.
