Final Regulations Issued for the Alternative Simplified Research Tax Credit

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Final Regulations Issued for the Alternative Simplified Research Tax Credit

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Final Regulations Issued for the Alternative Simplified Research Tax Credit
The IRS released final regulations (T.D. 9528) regarding the election and calculation of the alternative simplified credit (ASC) for increasing research and activities under section 41(c)(5). These final regulations contain only slight revisions to proposed and temporary regulations that were issued in 2008. They provide rules for electing the ASC that are similar to the rules for electing the Alternative Incremental Research Credit (AIRC) found in Treas. Reg. section 1.41-8. The regulations include rules for controlled groups and short taxable years and provide special rules that help to ensure consistency in calculating the credit. The new regulations were effective on June 9, 2011. Discussion Section 41(a)(1) provides an incremental tax credit for increasing research activities equal to 20 percent of a taxpayer's qualified research expenses (QREs) for a given tax year above a base amount. Because the rules for calculating the section 41(a) credit are complex, Congress added the Alternative Simplified Credit to the Internal Revenue Code in The Tax Relief and Health Care Act of 2006. Under the ASC, which is found in section 41(c)(5), a taxpayer may elect to take a credit equal to 14 percent of the excess of QREs for the tax year over 50 percent of the average QREs for the three preceding tax years. If a taxpayer has no QREs in any one of the three preceding tax years, the ASC is 6 percent of the QREs for the tax year for which the credit is being determined. In 2008, the Treasury Department issued final and temporary regulations (T.D. 9401) relating to the election and calculation of the ASC. These regulations were scheduled to terminate on or before June 13, 2011. After considering comments received on the 2008 regulations, the Treasury adopted them with some minor revisions. Like the 2008 regulations, the final regulations generally provide that the manner for electing and revoking the ASC is the same as that provided for the alternative incremental research credit (AIRC) in Treas. Reg. section 1.41-8. Specifically, an ASC election applies to the tax year in which it is made and all succeeding tax years unless the commissioner grants consent to revoke the election. The election is made by completing the relevant portion of Form 6765, Credit for Increasing Research Activities, and attaching the completed form to the taxpayer's timely filed original return. Importantly, the election may not be made or revoked on an amended return and may not be revoked except with IRS consent. The IRS will not grant an extension of time to make or revoke an ASC election under Treas. Reg. section 301.9100-3 The regulations also require each member of a controlled group of corporations that is not included in a consolidated return to meet the same election and revocation requirements as the group that files the consolidated return. These rules are described above. If any member fails to timely make or revoke an election, each member of the group must compute the group credit using the method used to compute the group credit for the immediately preceding credit year. In issuing the final regulations, Treasury addressed various concerns raised by commenters about the 2008 regulations. It rejected comments that the provisions of the 2008 regulations adopted by the final regulations, which require the same election procedures for the ASC that are used for the AIRC, are too restrictive. Treasury noted that symmetry between the two was necessary for tax administration and fairness. The Treasury did adopt one commenter's suggestion to change the ASC short tax year rules to prorate short years by the number of days in the year, not months, in order to provide a more accurate calculation and remove uncertainty as to whether and how to include a partial month in the calculation. This treatment is required for tax years that begin after June 9, 2011, and taxpayers that have already filed returns in which a short year was prorated on a monthly basis are permitted to amend their returns to reflect the daily calculation. Tom Windram, Managing Director, Washington National Tax

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Final Regulations Issued for the Alternative Simplified Research Tax Credit

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