The Treasury Department and IRS today released for publication in the Federal Register final regulations (T.D. 9712) relating to the election of the alternative simplified credit (ASC) under section 41(c)(5).
Today's regulations [PDF 209 KB] finalize temporary regulations (T.D. 9666) and, by cross-reference, proposed regulations (REG-133495-13) that were published June 3, 2014, and which allowed taxpayers to make an ASC election for an earlier year on an amended return. The final regulations make no substantive changes to the temporary regulations, but clarify a few important issues.
Today's final regulations affect certain taxpayers claiming the credit under section 41.
The ASC is an elective method of computing the research credit.
A taxpayer that elects to use the ASC is allowed a credit under section 41(a)(1) equal to 14% of the amount by which its qualified research expenses (QREs) for the tax year exceed 50% of its average QREs for the three preceding tax years. An electing taxpayer that does not have any QREs in one or more of the three preceding tax year is allowed an ASC equal to 6% of its QREs for the tax year. If the ASC is not used, the research credit is computed under the “regular” method as 20% of QREs for the tax year in excess of a base amount determined by the taxpayer’s research spending in some historic period.
The Code does not specify the time or manner of making or revoking the ASC election, but IRS regulations explain that the ASC is elected by filing Form 6765, Credit for Increasing Research Activities, for the year of the election, and using that method to compute the credit. An election to use the ASC remains in effect until it is revoked with the consent of the IRS. The election is revoked (and deemed to have the consent of the IRS) by properly computing the credit using the regular method on the Form 6765 that is timely filed for a tax year.
Prior to the temporary regulations, the ASC election could be made only on a timely filed (including extensions) original return for the tax year to which the election applies.
Today‘s final regulations, like the temporary regulations, allow a taxpayer to make an ASC election on an amended return, but only if the taxpayer has not previously claimed a section 41(a)(1) credit on an original or amended return for that tax year.
Also, the final regulations, like the temporary regulations, specify that the election can only be made if the tax year is not closed by the period of limitations on assessment, under section 6501(a). This is generally three years from the date the return was filed, but no earlier than three years from the due date of the return (with extensions). In some situations, the period of limitations on assessment can be extended.
The final regulations clarify that a taxpayer that had previously claimed a credit for that tax year under section 41(a)(2) for basic research payments, or a credit under section 41(a)(3) for payments to an energy research consortium for energy research, but not a credit under section 41(a)(1), may still make an ASC election for that earlier tax year.
Like the temporary regulations, the final regulations state that if any member of the taxpayer’s controlled group claimed a research credit for the tax year, on an original or amended return, the taxpayer cannot make an ASC election on an amended return for that tax year.
The final regulations also continue the IRS’s policy that taxpayers may not request “9100 relief” to make an ASC election beyond the time stated in the final regulation.
For calendar year corporations that filed their tax returns on an extension, the final regulations allow an ASC election to be made for 2011 or later tax years.
To make the ASC election for an earlier tax year, an actual amended return for that earlier tax year must be filed, with a Form 6765 attached making the election. Even if there is no change to the tax amount for that tax year, on account of the election, the amended return must be filed.
KPMG had submitted comments on the temporary regulations, and requested that a taxpayer be allowed additional time to make an ASC election on an amended return in some situations, such as when the taxpayer would be able to use a research credit from the election year only as a carryforward to a later tax year. The IRS did not accept this suggestion; the preamble states that an election within the period for assessment is “a reasonable time period for taxpayers to determine whether or not to make an ASC election” for an earlier tax year.
At KPMG’s request, the preamble to the final regulations clarifies that a taxpayer that made a section 280C(c)(3) election on a timely filed return in the regular credit method section of Form 6765, without claiming any amount of regular credit on the form (or on an amended return), would not, in and of itself, be considered to have claimed a credit for that year that would prevent the taxpayer from making an ASC election on an amended return for that year. A section 280C(c)(3) election allows the taxpayer to use a reduced research credit percentage and avoid the requirement that its deduction for research expenses be reduced by the amount of the credit. The ability to make an ASC election on an amended return does not in any way affect the requirement that a section 280C(c)(3) election must be made on a timely filed return (with extensions) for the tax year; the section 280C(c)(3) election applies only to that tax year.
An election to use the ASC remains in effect for later years until the tax year in which the taxpayer revokes the ASC election. The final regulations do not change that statutory rule. An ASC election can be revoked only by completing the regular credit portion of Form 6765 and attaching that to a timely filed tax return for the tax year of the revocation. Thus, a taxpayer that properly makes an ASC election for an earlier tax year on an amended return would be able to continue using the ASC for the following tax years unless a timely filed return had been filed for the later year claiming a credit using the regular credit method. A separate election to use the ASC does not need to be made to use the ASC for those following tax years
The regulations are effective on the date of publication in the Federal Register, which is scheduled for February 27, 2015.
For more information, contact a tax professional with KPMG’s research credit practice:
David P. Culp | +1 (202) 533-4104 | firstname.lastname@example.org
Tyrone Montague | +1 (212) 954-6818 | email@example.com
Christine Kachinsky | +1 (212) 872-2187 |firstname.lastname@example.org
Michael Brossmer | +1 (408) 367-4127 | email@example.com
Richard G. Blumenreich | +1 (202) 533-3032 | firstname.lastname@example.org
Ed Jankun | +1 (704) 371-8090 | email@example.com
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