T.D. 9528, 06/09/2011; Reg. §1.41-6, Reg. §1.41-8, Reg. §1.41-9
IRS has issued final regs relating to the election and calculation of the alternative simplified credit under Code Sec. 41(c)(5). The final regs generally adopt the proposed regs issued in 2008, with minor revisions.
Background. Code Sec. 41(a)(1) provides an incremental tax credit for increasing research activities (research credit), and is based on a percentage of a taxpayer's qualified research expenses (QREs) above a base amount.
The Tax Relief and Health Care Act of 2006 (P.L. 109-432) made certain changes to the research credit, including the addition of the alternative simplified credit (ASC). The ASC provides another method that taxpayers may elect to use in computing the amount of the research credit.
Taxpayers may elect an ASC to replace the portion of the research credit provided under Code Sec. 41(a)(1) (i.e., 20% of the excess, if any, of the qualified research expenses (QREs) for the tax year over a base amount). The ASC is equal to 14% of the excess of the QREs for the tax year over 50% of the average QREs for the three tax years preceding the tax year for which the credit is being determined. (Code Sec. 41(c)(5)(A))
If a taxpayer has no QREs in any one of the three preceding tax years, the ASC is 6% of the QREs for the tax year for which the credit is being determined. (Code Sec. 41(c)(5)(B)) An ASC election applies to the tax year for which made and all succeeding tax years unless revoked with IRS consent. (Code Sec. 41(c)(5)(C))
Final regs. The final regs adopt as revised the proposed regs issued in 2008, which were scheduled to terminate on or before June 13, 2011 (Reg. §1.41-9T(d), Reg. §1.41-9T(e)).
The final regs generally provide the same rules related to ASC elections and revocations as those provided for the alternative incremental research credit (AIRC) in Reg. §1.41-8. If a taxpayer makes an ASC election, the election applies to the tax year for which made and all subsequent tax years unless revoked. An ASC election is made by completing the relevant portion of Form 6765, “Credit for Increasing Research Activities” (or successor form), and attaching the completed form to the taxpayer's timely filed (including extensions) original return for the tax year to which the election applies. (Reg. §1.41-9(b)(2)) The election may not be made or revoked on an amended return, and may not be revoked except with IRS consent. (Reg. §1.41-9(b)(3)) Also, taxpayers will not be granted an extension of time to make or revoke an ASC or AIRC election under Reg. §301.9100-3. (Reg. §1.41-9(b)(3))
For a controlled group of corporations, all the members of which are not included on a single consolidated return, an election or revocation must be made by the designated member by satisfying the requirements described above. The election or revocation by the designated member is binding on all the members of the group for the credit year to which the election or revocation relates. If the designated 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. (Reg. §1.41-9(b)(4))
IRS also addressed a number of concerns raised by commenters regarding the proposed regs. IRS rejected comments that certain aspects of the proposed regs are too restrictive, noting that both it and the Treasury Department believe that tax administration and fairness are best served by adopting the same election procedures for the ASC that are used for the AIRC. However, IRS agreed with 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. Accordingly, the final regs require short tax years to be prorated by the number of days in the year, 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. (Reg. §1.41-9(c)(3))
Effective date. The final regs are applicable for tax years beginning after the publication date (June 10, 2011). For tax years ending on or before that date, taxpayers are referred to Reg. §1.41-9T.
References: For the alternative simplified credit election under the research credit, see FTC 2d/FIN ¶L-15302.2; United States Tax Reporter ¶414.0107; TaxDesk ¶384,003.1; TG ¶15115.