FIN 48 and R&D tax credits.

• Author: Bard, Chris
• Position: Financial Accounting Standards Board Interpretation No. 48, research and development

Under Financial Accounting Standards Board Interpretation No. (FIN) 48, Accounting for Uncertainty in Income Taxes, claims for research and development (R&D) credits are tax positions that companies following GAAP must evaluate to determine whether (and the extent to which) they may be recorded as a tax benefit in financial statements for fiscal years beginning after Dec. 15, 2006.

FIN 48 Evaluations

In general, FIN 48 calls for companies to:

1. Inventory their tax positions (i.e., identify all positions taken or expected to be taken);

2. Determine which positions meet the "recognition threshold" (i.e., are more likely than not (MLTN) to be sustained on examination, including resolution of any appeals or litigation processes) and derecognize positions that do not, or cease to, meet that threshold; and

3. Measure the benefit of recognized positions (i.e., identify the largest amount of benefit for each position that meets the MLTN threshold that is more-than--50% likely to be realized on ultimate settlement with tax authorities). This is the amount of benefit to record in financial statements.

Identifying the R&D Credit Tax Position

First, a tax adviser should consider the scope of the position. This means considering all the company's activities and costs and all the jurisdictions in which benefits for R&D exist (i.e., most U.S. states and more than 30 countries). It also means considering all the tax years that can be included in the tax position.

2006 and 2007: On Dec. 20, 2006, the Sec. 41 R&D credit, which had expired at the end of 2005, was extended to include costs incurred through the end of 2007.

Certain closed years: Under certain circumstances, R&D credit positions may also include credits generated in tax years for which the statute of limitations has run. Provided they could not have been used in an earlier, closed year, under Rev. Rul. 82-49, such credits may be carried forward to and used in an open tax year.

Determining Which Positions Meet the Recognition Threshold

There are three steps in making this determination:

Step one--identify appropriate unit(s) of account: The appropriate unit(s) of account for an R&D credit position must be determined based on all available evidence. This includes how the company prepares and

supports its tax returns, and the approach it anticipates the taxing authority will take during an examination.

FIN 48 uses R&D credit projects as an example of a unit of account, and the IRS and state authorities often examine R&D credit costs by project. Thus, projects can be appropriate units of account. Many companies, however, do not have project accounting systems; even those that do may find using other units of account...