United States

Regulations for alternative simplified research credit made final

ASC method may now be elected on amended return

TAX ALERT  | 

Newly released regulations make final the temporary and proposed regulations released in 2014, allowing taxpayers to claim the research tax credit using the alternative simplified credit method on amended returns. 

On Feb. 26, 2015, the IRS issued final research tax credit regulations that provide certain taxpayers that failed to calculate or claim the credit in prior years the opportunity to do so on an amended return. These regulations reverse the IRS position in 2011 regulations that prevented taxpayers from claiming prior-year research credits under the alternative simplified credit (ASC) method.

Background

The research credit is based on an incremental calculation formula, intended to reward increases in research activity. The credit may be calculated using either the regular method or the ASC method. The regular method requires taxpayers to calculate a historical fixed-base percentage based on the ratio of research expenses to gross receipts from the 1984-1988 tax years, or to use a complex start-up company calculation if there was little or no activity in the 1984-1988 base years. The regular method involves a time-consuming and costly process of gathering and substantiating many years of historical data.

The ASC method is preferred by many taxpayers because it only requires the accumulation of qualified research expenditures for the three preceding tax years to calculate the base amount, and gross receipts are not a factor in the calculation.

The regular method is the default method, and the ASC method must be affirmatively elected on the tax return. Prior to the issuance of the 2014 temporary and proposed regulations and the succeeding 2015 final regulations, the ASC could only be elected on an originally filed return. This restriction prevented many taxpayers from recovering tax credits for prior-year research activities due to insufficiently reliable records from the historical base years or a lack of internal resources.

Conditions and limitations

The final regulations contain three important conditions that must be satisfied for a taxpayer to elect the ASC method for a previous tax year on an amended return:

  1. The taxpayer did not claim the research tax credit using the regular method on its original return or a previously filed amended return for that tax year
  2. The tax year is not closed by the statute of limitations for assessment (generally three years from the date the original return was filed)
  3. If the taxpayer is a member of a controlled group, no member of the group previously claimed the research credit under the regular method for the same tax year

The preamble to the final regulations clarifies that the ASC method may not be elected for a closed year where the credit would be carried forward to an open year, even though this may be done for the regular credit in accordance with Rev. Rul. 82-49.

Effective date

The final regulations are effective for tax years ending on or after Feb. 27, 2015. For taxable years ending before Feb. 27, 2015, the temporary and proposed regulations may be relied upon (effective for tax years ending on or after June 3, 2014). Taxpayers may also rely upon the final regulations to elect the ASC method on amended returns for all tax years open under the statute of limitations.

Takeaway

These regulations provide the opportunity for taxpayers that failed to originally claim the research credit in previous years to calculate and claim a credit under the ASC method for open tax years. The ASC method is simpler to calculate and easier to document because it only requires three years of recent historical data.

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