United States

IRS issues final 280C regulations

TAX ALERT  | 

Executive summary

In T.D. 9539, the IRS issued final regulations that simplify the IRC section 280C(c)(3) elections to claim a reduced research credit. In large part, these regulations adopt proposed regulations that were issued in 2009 (REG-130200-08), which required the election to be made on Form 6765, "Credit for Increasing Research Activities." Under those regulations, the election must be made on a Form 6765 that is filed with an original return by the due date for filing that return. The election is irrevocable for that tax year. In a change from the proposed regulations, the final regulations provide that each member of a controlled group may make a 280C(c)(3) election after the group credit is computed even if a member does not claim a credit. For consolidated groups, only a common parent may make the election on behalf of the members.

Discussion

Section 280C(c)(1) provides that no deduction is allowed for that portion of the qualified research expenses or basic research expenses otherwise allowable that is equal to the section 41(a) credit. Similarly, section 280C(c)(2) provides that, if the section 41(a)(1) credit exceeds the allowable deduction amount for qualified research expenses or basic research expenses, the amount chargeable to capital account for the taxable year for such expenses is reduced by that excess amount. However, neither of these sections apply if a section 280C(c)(3) election is made and the section 41(a) credit for that year is equal to the excess of the amount of credit determined under section 41(a)1 over the product of the amount of credit determined under section 280C(c)(3)(B)(i) and the maximum rate of tax under section 11(b)(1). Under section 1.280C-4(a), these elections must be made by claiming the reduced credit under section 41(a) on an original return for the taxable year. Elections become irrevocable for that taxable year once they are made.

Section 280C(c)(4) provides that section 280C(b)(3) applies for purposes of section 280C(c). Under section 280C(b)(3), in the case of a corporation that is a member of a controlled group of corporations2 or a trade or business under common control,3 section 280C(b) is applied using rules similar to those found in sections 41(f)(1)(A) and (f)(1)(B). Section 1.41-6(a)(1) provides that, to determine group member's research credit, a parent must: (a) compute the group credit in the manner described in section 1.41-6(b), and (b) allocate the group credit among the members of the group in the manner described under section 1.41-6(c). All members of the controlled group are required to use the same computation method (i.e., traditional or simplified).

The final regulations in T.D. 9539 simplify the section 280C(c)(3) election by requiring that it be made on Form 6765.The form containing the election must be filed with an original return for the year on or before the due date (including extensions). These elections become irrevocable for that taxable year. The final regulations also provide that each member of a controlled group may make a 280C(c)(3) election after the group credit is computed and allocated under sections 1.41-6(b)(1) and 1.41-6(c). This rule was included because one of the commentators on the temporary regulations was concerned that the controlled group rules in the proposed regulations might cause administrative complexity if each member of a group had to file a separate Form 6765.

Generally, the proposed regulations provided that each member of a controlled group or a trade or business under common control could make the election. However, the final regulations add that only a common parent4 of a consolidated group may make the election on behalf of the members. An attachment to a Form 6765 filed by a common parent that adequately identifies the members for which an election is made is sufficient to clearly indicate the intent to make the election for those members. Another commentator believed that some members of a controlled group may fail to make a timely election under section 280C(c)(3) because, at the time of filing the Form 6765 with the original return, no credit was reported by such members. The final regulations confirm that elections may be made whether or not a taxpayer claims any amount of credit on its original return by providing an example where no credit is claimed by a member.

Conclusion

The final 280C(c)(3) regulations do not significantly change the guidance provided in the temporary regulations that were issued in 2009. Such elections must be filed on Form 6765 with a timely filed original return. Each member of a controlled group may make the election after the group credit is computed, even where no credit is claimed. Notably, for consolidated groups, only a common parent may make the election.

1Without regard to section 280C(c)(3)
2
Within the meaning of section 41(f)(5)
3
Within the meaning of section 41(f)(1)(B)
4
Within the meaning of section 1.1502-77(a)(1)(i)

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