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Regulations: Allocation of research credit among members of controlled group

Research credit among members of controlled group

The Treasury Department and IRS today released for publication in the Federal Register temporary regulations (T.D. 9717), and by cross-reference, proposed regulations (REG-133489-13) concerning allocation of the research credit to corporations, trades or businesses under common control—i.e., allocation of the research credit to members of a controlled group.


Related content

These regulations also provide guidance concerning allocation of the railroad track maintenance credit under section 45G.

The temporary regulations [PDF 207 KB] are effective for tax years beginning on or after the date when they are published in the Federal Register, scheduled for Friday, April 3, 2015. The temporary regulations are scheduled to expire on April 2, 2018. A taxpayer may apply the temporary regulations for tax years beginning after December 31, 2011, but before April 3, 2015. If a taxpayer decides not to apply the temporary regulations for a tax year beginning after 2011 and before April 3, 2015, the provisions of Notice 2013-20 (described below) are to apply.

The proposed regulations [PDF 220 KB] state that comments and requests for a public hearing must be received 90 days after April 3, 2015 (the date of publication in the Federal Register).


All members of a controlled group are treated as a single taxpayer for purposes of computing the research credit. The group credit is computed by applying all of the section 41 computational rules on an aggregate basis. After the group credit is computed, it must be allocated among the members of the group.

For tax years beginning prior to January 1, 2012, section 41 provided that the research credit allowable to a controlled group member is “its proportionate shares of” the qualified research expenses, basic research payments, and amounts paid or incurred to energy research consortiums (collectively, referred to as QREs) “giving rise to the credit.”

Regulations in effect since 2006 required a controlled group to allocate the group credit in a two-step procedure:

  • First, in proportion to each member's stand-alone entity credit, in situations when the group credit does not exceed the sum of the stand-alone entity credits of all of the members; and
  • Second, if the group credit exceeds this sum, by allocating the excess group credit in proportion to the QREs of the members of the controlled group

Legislative change

A provision of the American Taxpayer Relief Act of 2012 (enacted January 2, 2013) requires the allocation of research credits to each controlled group member “…on a proportionate basis to its share of the aggregate of the qualified research expenses, basic research payments, and amounts paid or incurred to energy research consortiums, taken into account by such controlled group for purposes of this section."

These changes provide that the group credit is allocated to group members based on a member’s share of QREs—without regard to whether the member would have a stand-alone entity credit or what the amount of any such credit would be.

This provision was effective retroactively—for tax years beginning after December 31, 2011.

The IRS in March 2013 issued Notice 2013-20 that, consistent with the new statutory language, provided that for tax years beginning after December 31, 2011, controlled groups must allocate the group credit to each member of the controlled group in proportion to each member’s contribution of QREs to the controlled group’s total QREs for the tax year. Notice 2013-20:

  • Emphasized that there is no longer a requirement to consider the stand-alone credit amounts of the members
  • Provided that, if there are members of the controlled group that constitute a consolidated group of corporations, the allocation methodology is applied, first, to allocate a portion of the group credit to the consolidated group, and, second, to allocate the consolidated group’s credit within the consolidated group
  • Included as an example of the new allocation rule, if there is a controlled group with a $100 credit in a tax year in which the three members have $200, $300, and $500 of QREs, respectively, the credit is allocated $20, $30, and $50, respectively, among the three members


Today’s regulations follow the allocation approach in Notice 2013-20. Therefore, the group credit is allocated to group members based on a member’s proportionate share of the controlled group’s aggregate QREs. Group members are no longer required to calculate a stand-alone entity credit.

The temporary regulations make one clarification to the allocation method. There are three separate items included in the section 41 research credit—the general credit for incremental research credit spending, a separately computed credit for certain basic research payments to certain schools and nonprofit research organizations, and a separately computed credit for certain payments to energy research consortiums for energy research.

Under the temporary regulations, the group credit is the total of these three amounts, computed for the group. The allocation would be based on all of the payments made by members of the group that contribute to any of these three separately computed credits. That is, if a member of the group paid QREs that were counted in the group’s incremental credit, and also made payments that were counted in the group’s basic research credit, the QREs for that member of the group used to allocate the group credit would be the sum of those payments. There is not, according to the temporary regulations, a separate allocation among the members of the incremental credit, of the basic research credit, and of the credit for energy research payments.

The temporary regulations remove references to the stand-alone entity credit, and provide new examples illustrating a general application of the allocation method and when a consolidated group is treated as a single member of a controlled group.

For tax years beginning before January 1, 2012, the provisions of Reg. section 1.41-6 continue to apply in their entirety.

Separately, the temporary regulations provide guidance under the railroad track maintenance credit of section 45G, which, like the research credit, must be computed on a controlled group basis and allocated among the members, using the same principles as for the research credit.

Lastly, the regulations make changes to an example in the regulations under section 280C(c)(3), relating to the requirement that a taxpayer with a research credit must reduce its deduction for the amount of the credit, unless it makes an election to use a reduced research credit percentage. The revised example reflects that the research credit allocation method is based entirely on the QREs of the members.

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