United States

IRS removes restriction on electing simplified research tax credit

TAX ALERT  | 

On June 2, 2014, the IRS issued final and temporary regulations (TD 9666) relating to the research tax credit. These new regulations provide taxpayer-friendly changes to the calculation method elections, providing certain taxpayers that failed to calculate or claim the credit in prior years the opportunity to do so on an amended return. These regulations remove some of the administrative burdens that prevented small and mid-sized taxpayers from claiming prior-year research credits under the alternative simplified credit method.

Background

The research credit is intended to reward increases in research activity and, therefore, is designed as an incremental credit. The credit can be calculated in one of two ways: the traditional method or the alternative simplified credit (ASC) method. The traditional method requires taxpayers to calculate a historical fixed-base percentage consisting of research expenses and gross receipts from the 1984-1988 tax years, or to use a complex start-up calculation if there was little or no activity in the 1984-1988 base years. Whether the base period or start-up calculation is used, many years of historical data must be accumulated and analyzed. The process of gathering and substantiating the information required to calculate the traditional credit can be time-consuming and costly. 

As its name implies, the alternative simplified credit reduces the burden of gathering many years of historical data by only requiring the taxpayer to accumulate qualified research expenditures for the three preceding tax years in order to calculate the base amount. The trade-off to using the ASC method was that it could only be elected on a timely filed (including extensions), original tax return–until now.

Limitations

The newly issued regulations allow taxpayers to elect the ASC calculation method on amended tax returns. This rule, however, is subject to certain limitations. Taxpayers that previously claimed the credit under the traditional method in open years are barred from amending returns to switch to the ASC method. The IRS stated that this is to prevent the same research credit claim from being subject to audit more than once due to the change in calculation methods. Further limitations apply to taxpayers in a controlled group, which are now barred from filing amended returns to use the ASC method if any member of the group previously claimed the research credit under the traditional method for the same tax year.

Takeaway

Though the regulations are effective for tax years ending on or after June 3, 2014, taxpayers may file amended returns to use the ASC method for all tax years open under the statute of limitations (generally three years). This provides an unprecedented opportunity for taxpayers that failed to originally claim the research credit in previous years to calculate and claim a credit under the ASC for open tax years. This could benefit taxpayers that passed on the opportunity to claim the credit due to the burden of gathering many years of historical information, as well as the thousands of eligible small and medium-sized taxpayers that never took advantage of the research credit. Taxpayers should contact their tax advisors to discuss the implications of these new regulations and determine the benefit of potentially amending previous returns to claim the research credit under the ASC method.

This document contains general information, may be based on authorities that are subject to change, and is not a substitute for professional advice or services.  This document does not constitute assurance, tax, consulting, business, financial, investment, legal or other professional advice, and you should consult a qualified professional advisor before taking any action based on the information herein.  RSM LLP, its affiliates and related entities are not responsible for any loss resulting from or relating to reliance on this document by any person.

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