Final Regulations Simplify Rules for Electing Reduced Research Tax Credit

By Liz White

The Internal Revenue Service issued final regulations (T.D. 9539) July 26 that simplify how taxpayers elect to claim the reduced research tax credit.

The final regulations follow proposed rules from July 2009 (REG-130200–08). There was no public hearing on the proposed regulations, but IRS considered written comments in revising the final rules.

The regulations simplify the Section 280C(c)(3) election by allowing taxpayers to make the reduced credit election on Form 6765, Credit for Increasing Research Activities. Before these regulations, taxpayers had to claim the reduced credit on the original return, which meant knowing the dollar amount of the research credit, Jim Shanahan, a partner at PricewaterhouseCoopers LLC in Washington, D.C., told BNA.

The final regulations, however, simplify significantly how taxpayers claim the reduced credit, he said. Rather than using the original return, the taxpayer claims the reduced credit by “clearly indicating an intent to make the election on Form 6765,” which is attached to the original return.

“So that's very good news, so there is certainty then with a taxpayer who wants to make this election in situations where they don't know the actual dollar amount of the credit, that they are able to express in words an intent to make this election,” he said.

The form should be included with an original return for the taxable year filed on or before the due date, including extensions, for filing the income tax return, IRS said. Once an election is made for any taxable year, it is irrevocable for that taxable year.

Election Beneficial to Clients

IRS added an example to the final regulations that is key to understanding how the election can be beneficial to clients. The example makes it clear that taxpayers can make the election whether or not they claim any amount of credit on the original return, said Shanahan, who heads the firm's global research incentives department.

Taxpayers should always consider making an intent-based election when filing an original return, he said.

Consolidated Group Questions Clarified

IRS received a comment suggesting that the controlled group rules in the proposed regulations could lead to administrative complexity for members of a controlled group filing a consolidated return because each member would have to file a separate form to make the election. In the proposed regulations, all members of the controlled group had to use the same calculation method—the Section 41(a)(1) method, the Section 41(c)(4) alternative incremental credit method, or the Section 41(c)(5) alternative simplified research credit method— to compute the group credit for the year.

To clarify and simplify the procedure for members of consolidated groups, the final regulations add that only a common parent, as defined by the Internal Revenue Code, of a consolidated group makes the election for the credit on behalf of the members of the consolidated group.

The regulations are not a significant regulatory action, so a regulatory assessment was not required. The final regulations will be published and will be effective July 27.

The complete text of this article can be found in the BNA Daily Tax Report, July 27, 2011.