United States

IRS simplifies controlled group research credit allocation method

Final regulations issued to provide guidance on 2012 tax law change


The IRS has issued final and temporary regulations on the calculation of the research tax credit for taxpayers in a controlled group. The regulation, a follow-up to previous IRS guidance, simplifies the calculation of the credit making the credit available to more taxpayers.   

In the past, computing the research tax credit in a controlled group has required two computations: (1) a computation of the overall group tax credit, and (2) a computation of a research tax credit for each member of the controlled group. The group tax credit is then allocated to each group member in proportion to each member's stand alone credit. To the extent, if any, that the group credit exceeds the aggregate of the member's credit, the remaining credit is allocated to each member in proportion to the qualified research expenses of the members of the controlled group.

In the American Taxpayer Relief Act of 2012, Congress addressed the needless complexity of the controlled group calculation. Section 301(c) of the Act amended section 41(f) to simplify the group credit calculation by requiring a single calculation of the credit at the group level, and then allocating the group credit to each member proportionate to each member's qualified research expenses. The IRS issued Notice 2013-20 to provide interim guidance to taxpayers, pending the issuance of regulations.

The newly issued regulations implement the changes to section 41(f) and generally simplify the calculation of the credit. Under the regulations, a taxpayer makes only one research tax credit calculation on a group basis, and then allocates the aggregate credit to each member in proportion to the qualified research expenses incurred by each member. Taxpayers are no longer required to do separate credit calculations for each member of the group, in addition to the overall group credit calculation. Simplifying the credit calculation will greatly reduce the burden on taxpayers, making the research tax credit easier to claim.

The regulations, effective April 3, 2015, allow taxpayers to follow the approach taken in the regulations and Notice 2013-20 for tax years beginning after Dec. 31, 2011. For taxpayers in a controlled group that intend to claim a credit on their 2014 tax returns, the credit will be easier to calculate and claim on the controlled group members' tax returns.    


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