A Practical Guide to The Department of Treasury’s Amendment to Utilize the Alternative Simplified Credit Methodology on Amended Tax Returns
(Contributing Author: Peter J. Scalise June 5, 2014)

Introduction

On June 2, 2014, The Department of Treasury released for publication in the Federal Register both Temporary Treasury Regulations (T.D. 9666) and Proposed Treasury Regulations (REG-133495-13) in connection to the Alternative Simplified Credit (hereinafter “ASC”) methodology for purposes of the Research and Experimentation Tax Credit (hereinafter “RTC”). These revised Treasury Regulations represent a true paradigm shift from the previously issued set of Final Treasury Regulations which only allowed companies to take the RTC utilizing the ASC on originally filed tax returns.

Synopsis

The ASC methodology is an elective method for computing the RTC. A taxpayer that elects to utilize the ASC is allowed a credit equal to 14% of the amount by which its Qualified Research Expenditures (hereinafter “QREs”) for the taxable year exceed 50% of its average QREs for the three preceding taxable years. An electing taxpayer that does not have any QREs in one or more of the three preceding taxable years is allowed an ASC equal to 6% of its QREs for the taxable year. An election to utilize the ASC remains in effect until it is revoked with the consent of the Internal Revenue Service (hereinafter the “Service”). It should be duly noted that the statute does not postulate the time or manner of making or revoking the election. However, the Treasury Regulations clarify that the ASC methodology is elected by filing Form 6765, entitled “Credit for Increasing Research Activities”, and utilizing that methodology to calculate the RTC on a timely filed tax return. The election is revoked by properly computing the RTC utilizing a different method on Form 6765 that is filed for a taxable year.

In addition, pursuant to the Final Treasury Regulations released back in June of 2011, the manner of making a proper election and corresponding calculation of the ASC requires that Form 6765 be attached to a timely filed tax return (i.e., including extensions) for the taxable year to which the election applies. As discussed under Treas. Reg. § 301.9100-3, a taxpayer was not allowed to make an ASC election on an amended tax return.

The preamble to the June 2, 2014 release of the Temporary Treasury Regulations explains that the Service received a number of requests by lobbying groups to amend the June 2011 Final Treasury Regulations so as to allow taxpayers to make an ASC election on an amended tax return. Proponents of this change explained that the burden of substantiating expenditures including the associated costs of documenting a taxpayers fixed base period percentage (e.g., often times going as far back to 1984 and rebuilding through the current year under review such as 2013) under the regular credit methodology can be too arduous and highly impractical.

In response to these direct requests and issues, the June 2nd set of Temporary Treasury Regulations and Proposed Treasury Regulations remove the rule prohibiting taxpayers from making an ASC election on an amended tax return, and permit taxpayers to make an ASC election for a taxable year on an amended return.

As a caveat, the Temporary Treasury Regulations also provide that a taxpayer that previously claimed a RTC on an original or amended tax return for a taxable year may not then go back and make an ASC election for that tax year on an amended tax return. The preamble specifically notes that permitting changes from the regular credit to the ASC on amended tax returns may result in more than one examination by the Service of a taxpayer’s RTC for that taxable year.

Scope & Application

These Regulations apply to elections with respect to taxable years ending on or after June 3, 2014 which is the date when these Regulations will be published in the Federal Register. The Temporary Treasury Regulations expire on June 2, 2017.

However, a taxpayer may rely on these Regulations to make an ASC election under I.R.C. § 41(c)(5) for a taxable 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.

Comments and requests for a public hearing with respect to the Proposed Treasury Regulations are due by the date that is 90 days after June 3, 2014.

About the Author

Peter J. Scalise serves as the Federal Tax Credits & Incentives Practice Leader for Prager Metis CPAs, LLC a member of The Prager Metis International Group. Peter is a highly distinguished BIG 4 Alumni Tax Practice Leader and has approximately twenty years of progressive public accounting experience developing, managing and leading multi-million dollar tax advisory practices on both a regional and national level.

Peter is also a renowned keynote speaker and an extensively published author on specialty tax incentives, tax controversy matters, and legislative updates from Capitol Hill for NAREIT, USGBC, AICPA, ASTP, NATP, ABA, AIA, TEI and serves as a volunteer member of the iShade Tax Faculty. Peter serves on both the Board of Directors and Board of Editors for The American Society of Tax Professionals (“ASTP”) and is the Founding President and Chairman of The Northeastern Region Tax Roundtable, an operating division of ASTP.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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