The cost center (which may also be referred to as the “departmental”) approach is a logical grouping of activities that often follows the organizational structure of the company.
The cost center approach tracks costs based on where within the company structure the cost was incurred. A cost center may contain:
- The activities on a single business component (in which case this approach does not differ significantly from the Project method),
- The activities on numerous business components (which may be related to one another), or
- The activities associated with only a portion of a particular business component.
Although there is not necessarily a direct relationship between particular costs and activities within a cost center system (so that taxpayers applying this approach instead of the project approach face the burden of establishing that the activities undertaken within each of the cost centers are qualified research), each cost center does represent a limited pool of costs and activities that are related to one another in some way.
In those situations where the costs charged to the cost center represent activities on more than one business component, a taxpayer employing the cost center approach will face the additional burden of segregating costs that do not qualify. If the research credit computed under a cost center approach is audited and the examiner determines that non-qualified activities were charged to a cost center that the Taxpayer had considered to be composed entirely of qualified costs and activities, the Taxpayer will face the challenge of allocating costs among the activities within the cost center.
In those situations where the costs charged to the cost center represent only a portion of the activities related to a particular business component, a taxpayer employing the cost center approach may face the additional burden of associating the activities of several cost centers with the business component in order to demonstrate that the activities are qualified research.
The additional burden the taxpayer faces in computing the Research Credit under this approach partially offsets the savings that can be realized from the simplicity of implementing and administering it.