Research Tax Credit Update – Alternative Simplified Credit Election Allowed on Amended Returns

The Treasury Department recently released final and temporary regulations permitting some taxpayers to elect the alternative simplified credit (“ASC“) on amended returns. 

Previously, the ASC election could only be made on a timely-filed original tax return (including extensions), requiring taxpayers who had not included the research credit on an original return to use the regular credit method for amended returns. This is a significant decision that will allow more taxpayers to take advantage of the research credit. Taxpayers may rely on the temporary regulations in making the ASC election for tax years preceding June 3, 2014, if the election is made prior to the expiration of the period of limitations for that year. 

Overview of the Research Credit

The research credit is available to taxpayers under Sec. 41 and is computed by utilizing one of two methods: the regular credit method, or the ASC method. The regular credit method results in a credit equal to 20 percent of the excess of a taxpayer's current-year qualified research expenses over a base-period amount. The base-period amount is calculated through an analysis of prior-year gross receipts and qualified research expenditures in a fixed base period. The ASC is an alternative method resulting in a 14 percent credit of current-year research expenditures exceeding 50 percent of a taxpayer's average qualified research expenditures incurred over the three prior years. Although the research credit expired for expenditures made after December 31, 2013, it is widely anticipated that the research credit will be extended retroactively for 2014.

Difficulties in Claiming the Research Credit

Claiming the research credit has not been without its challenges for many taxpayers, however, as the regular method requires taxpayers to use a fixed base period reaching back to 1984-1988 (special rules apply to companies not in existence during the fixed base period). The ASC method was first made available for taxable years beginning after December 31, 2006. The ASC method allows a taxpayer to look back to the three prior years of any filing year. However, the ASC election could only be made on a timely filed original return (including extensions). Therefore, taxpayers who had not claimed the research credit on the original return were unable to claim the research credit based on the ASC on an amended tax return. These taxpayers now have an opportunity to elect the ASC on an amended tax return and harvest unclaimed research credits.

ASC Allowed on Amended Returns

In response to requests made related to the burdens of the regular method and the inability to file amended returns using the ASC method, the Treasury Department and IRS issued TD 9666, finally allowing some taxpayers to elect the ASC method on amended returns. While the regulations do allow for the election of the ASC method in amended years, it does not allow the amended ASC election if a previously filed regular credit was claimed. Furthermore, controlled group members may also not make an amended ASC election if any member of the controlled group previously claimed a non-ASC credit method on that year's return.

The regulations are effective for taxable years ending on or after June 3, 2014, and are set to expire on June 2, 2017. However, taxpayers may rely on the temporary regulations in making the ASC election for tax years ending before June 3, 2014, if the election is made prior to the expiration of the period of limitations for that year. 

Summary

Companies devoting resources to the development of new products or processes, or to an improvement to an existing product or process, may be eligible for the research credit. Companies that did not include the research credit on an original tax return because of net operating losses may also benefit from electing the ASC on an amended tax return prior to the expiration of the statute of limitations. Many industries that have been able to take advantage of the research credit include the following:

  • Manufacturing
  • Information technology
  • Professional, scientific, and technical services
  • Wholesale and retail trade
  • Finance and insurance
  • Utilities
  • Many other sectors

If your company has not claimed the research credit in prior years, now is a great opportunity to take advantage of these favorable regulations. Andersen Tax can help you assess whether your research activities qualify under Sec. 41, calculate any unclaimed credits, and amend returns for prior periods to claim these credits.

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