The consistency rule states that in order to “accurately calculate a credit, the taxpayer is required to define qualified research expenditures the same from year to year.” The taxpayer also must show consistency between the credit year and the base year. Not only that, but the gross receipts in the base years also have to agree with the prior four years’ average.
According to the IRS, companies should consider the following questions with respect to the consistency requirement:
The consistency rule is an important rule for valuing your R&D Tax Credit. Valuing takes place after you’ve identified your qualified activities and before you file for the tax credit. Understanding the base level of R&D activities will help to identify a true increase in R&D activities that qualify for the tax credit.
Be sure to save any relevant documentation for at least four years as it may need to be used to prove out the consistency rule.
For example, in one case example shared by the IRS, a taxpayer was denied the research credit because the base period research expenses attributable to its "special system projects" could not be quantified. The expenses associated with these special projects were included in the credit year and the taxpayer said that the same type of expenses were incurred in the base period. Unfortunately, the taxpayer did not save the documentation and could not determine the amount incurred in the base period. This means the relative increase in qualified research expenses could not be measured and the credit could not be claimed.
Remember that all research activities must also pass the four-part test. Once you’ve identified potential qualifying activities, run them through the four-part test to verify. All parts of the test must be met in order to qualify. The four parts of the test are:
Applying for the R&D Tax Credit can be a complex process. Be sure to consult with a reputable R&D Tax Credit expert to ensure the process is completed in a thorough and accurate manner.