Alternative Simplified Research Credit Now Available on Amended Returns
June 12, 2014
Temporary regulations recently issued by the IRS offer new opportunities to taxpayers who want to claim the federal research and experimentation tax credit (R&E credit).
Since 2007, taxpayers have been able to compute their R&E credit using one of two sets of rules: the regular R&E credit rules or the alternative simplified credit (ASC) rules. The regular R&E credit, which is equal to 20 percent of a business’s qualifying research expense over a base amount (most often dated back to the 1984-1988 tax years) can be more favorable. The ASC, on the other hand, is equal to 14 percent of a business’s qualifying research expense over the prior three tax periods. However, the complicated base-period rules combined with the difficulty of gathering sufficient documentation for the base years for the regular R&E credit make the ASC appealing in many situations.
Historically, taxpayers could elect to use the ASC only on a timely filed original tax return. However, the new regulations, issued in Treasury Decision 9666, allow taxpayers to make the ASC election on an amended return. Taxpayers who already have claimed the R&E credit using the regular method cannot make an ASC election on an amended tax return. The new regulations also do not allow taxpayers to revoke an ASC election included on a previously filed tax return.
Taxable income also may be affected by a late ASC election. The law requires taxpayers to add qualified expenses used to calculate the R&E credit back to taxable income. This can result in additional tax liability where the taxpayer is subject to the alternative minimum tax and increased taxable income for state tax purposes. Taxpayers can elect to claim a reduced research credit in lieu of adding back the expenses (280C election), but a 280C election must be made on a timely filed tax return. Therefore, taxpayers making the ASC election on an amended return for a prior year will be unable to also make the 280C election unless they previously made a protective 280C election on their originally filed tax return.
The ASC regulations were issued in temporary form and expire on June 2, 2017, if not finalized before that date. The regulations are effective for tax years ending on or after June 3, 2014, but can be relied on for amending any years prior to that date for which the statute of limitations has not yet expired.
While the regulations offer taxpayers new opportunities to pursue credits in tax years when elections were not already made, taxpayers still should consider and evaluate any potential risks prior to filing an amended return claim.
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