FIN 48 – Uncertain tax positions – SOLUTION Kiley Corporation claims a research and experimentation tax credit of $1,000,000 on its tax return. Historically, the IRS has challenged whether some of the expenditures meet the definition of “qualified research expenses” under Sec. 41. Before the company can recognize the tax benefit, it must first determine if the tax position is “more likely than not” to be sustained on audit. Based on the technical merits of the position, the company believes that all the expenditures are valid and supportable, and the majority of them will be sustained on audit. The company has met the recognition threshold and must now determine the amount of the benefit to recognize. The company estimates that the following probability distribution of possible outcomes. Dollar amount of tax benefit that management anticipates will be sustained Probability that the tax position will be sustainedCumulative probability that the tax position will be sustained $1,000,000 30% 30% $910,000 30% 60% $850,000 40% 100% Kiley’s income tax payable before the credit is $50 million.
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Taxation in the United States, tax credit, tax benefit