Today’s temporary regulations [PDF 66 KB] and proposed regulations [PDF 16 KB] revise the rules for making the ASC election and allow the election on an amended return if a return claiming the credit has not previously been filed for that tax year.
The alternative simplified credit (ASC) is an elective method of computing the research credit.
A taxpayer that elects to use the ASC is allowed a credit 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.
An election to use the ASC remains in effect until it is revoked with the consent of the IRS. The Code does not specify the time or manner of making or revoking the election, but IRS regulations explain that the ASC is elected by filing Form 6765, Credit for Increasing Research Activities, and using that method to compute the credit. The election is revoked by properly computing the credit using a different method on the Form 6765 that is filed for a tax year.
Final regulations issued in June 2011 further addressed the manner of making the election and calculation of the ASC. Those final regulations—consistent with earlier temporary regulations—explained that the Form 6765 making the election must be attached to a timely filed (including extensions) original return for the tax year to which the election applies. A taxpayer was not allowed to make an ASC election on an amended return, and an extension of time under Reg. section 301.9100-3 to make the election could not be granted.
Temporary, proposed regulations
The preamble to today’s temporary regulations explains that Treasury and the IRS received numerous requests to amend the June 2011 regulations so as to allow taxpayers to make an ASC election on an amended return. Proponents of this change explained that the burden of substantiating expenditures and costs for the base period under the regular credit can be costly and time-consuming, and suggested that additional time was often needed to determine whether to claim the regular credit or the ASC.
In response to these requests, today’s temporary and proposed regulations remove the rule prohibiting taxpayers from making an ASC election on an amended return, and allow taxpayers to make an ASC election for a tax year on an amended return.
The temporary regulations also provide, however, that a taxpayer that previously claimed a section 41 credit on an original or amended return for a tax year may not then make an ASC election for that tax year on an amended return. The preamble notes that permitting changes from the regular credit to the ASC on amended returns could result in more than one audit of a taxpayer’s research credit for a tax year.
Also, the temporary regulations provide that a taxpayer that is a member of a controlled group in a tax year may not make an ASC election under section 41(c)(5) for that tax year on an amended return if any member of the controlled group for that year previously claimed the research credit using a method other than the ASC on an original or amended return for that tax year.
These regulations apply to elections with respect to tax years ending on or after June 3, 2014—which is the date when these regulations will be published in the Federal Register. The temporary regulations expire on June 2, 2017.
However, a taxpayer may rely on these regulations to make an ASC election under section 41(c)(5) for a tax year ending prior to June 3, 2014, if the taxpayer makes the election before the period of limitations for assessment of tax has expired for that year. The temporary regulations leave in effect the earlier admonition that 9100 relief will not be granted to make an ASC election beyond the time permitted by these regulations.
The ASC first went into effect for tax years ending after December 31, 2006. A taxpayer that has never filed a research credit for a particular tax year ending after 2006—using either the regular credit computation method or the alternative incremental credit (which was available for tax years beginning before January 1, 2009)—may now make an election on an amended return for that tax year to use the ASC, if the statute of limitations for a refund for that tax year is still open. If a proper election is made to use the ASC, either on an original or an amended return, for a particular year, that election remains in effect for subsequent tax years until there is a year in which a different method of computing the credit is properly used. A taxpayer with an ASC election in effect for a particular tax year will not be permitted to claim a credit on an amended return for that year using the regular method or the alternative incremental credit.
Comments and requests for a public hearing with respect to the proposed regulations are due by the date that is 90 days after June 3, 2014.