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IRS Issues Final Regulations for the Alternative Simplified Credit Election for the Research Credit


3/9/15

Synopsis
 
The Internal Revenue Service has published final regulations for the alternative simplified credit (ASC) election for the research credit under §41(c)(5). The regulations finalize the temporary and proposed regulations that were originally issued June 3, 2014.
 
Issue
 
The Tax Code provides a credit to taxpayers based on their qualified research expenses. A taxpayer can use the “regular” method or elect to use the alternative simplified credit (“ASC”) rules to calculate the allowable research tax credit. The taxpayer makes an ASC election by filing Form 6765, Credit for Increasing Research Activities, for the year of the election and by using the ASC method to compute the credit. Unlike the prior version of the regulations, the final regulations allow a taxpayer to make an ASC election on an amended return. This is permitted only if the taxpayer has not previously claimed a section 41(a)(1) credit computed under the regular rules on an original or amended return for that tax year. Once made, the ASC election remains in effect until proper revocation, which requires consent of the IRS. 
 
The final regulations are similar to the temporary regulations but clarify certain key provisions. There is a special rule for members of a controlled group claiming the research credit on an amended return. If any member of the controlled group claims a research credit under section 41(a)(1) for the tax year, the taxpayer cannot make an ASC election on an amended return for that tax year.
 
The IRS clarified that a taxpayer making a section 280C(c)(3) election (on Line 17 of Form 6765), Credit for Increasing Research Activities, where the regular credit is not claimed, would not be considered to be making a section 41(a)(1) credit claim. The taxpayer would, therefore, be precluded from making an ASC election. A section 280C(c)(3) election allows a taxpayer to make an annual irrevocable election to claim a reduced research credit instead of having to reduce the section 174 deduction, for research expenses, by the amount of the credit. Further, this election does not prevent a taxpayer from making an ASC election on an amended return for that tax year. A section 280C(c)(3) election must still be made on a timely filed return.
 
The final regulations apply to tax years ending on or after February 27, 2015.
 
What Does CohnReznick Think?
The final regulations represent a significant opportunity for taxpayers that might have benefitted from calculating an R&D credit using the ASC rules. For calendar year corporations that filed their tax returns by the original due date or on an extension, the final regulations allow an ASC election to be made for 2011 or later tax years. This is permissible as long as the statute of limitations is open (generally three years from the date the tax return is filed), and no R&D credit was taken on the original timely filed tax return. In addition, the ability to claim a 280(c) election on an originally timely filed tax return, without committing to which R&D credit the company will utilize – ASC or the regular credit – is very taxpayer friendly. It allows a taxpayer to make a 280(c) election on its originally timely filed return and not take an R&D credit on the original return. Then, the taxpayer can later amend the tax return and decide if the ASC credit or regular credit is more beneficial.

Contact

For more information, please contact Richard Shevak, director, at richard.shevak@cohnreznick.com or 862-245-5029, or Doug Finkle, senior manager, at doug.finkle@cohnreznick.com or 973-364-7832.
 
To learn more about CohnReznick’s Tax Practice, please visit our webpage.


Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

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