Certain Taxpayers Can Now Elect Alternative Simplified Credit on Amended Returns.
(Parker Tax Publishing July 1, 2014)

Final regulations remove the prohibition on making the alternative simplified credit on an amended return and temporary regulations allow the election on amended returns of certain taxpayers. REG-133495-13 (6/3/14); T.D. 9666 (6/3/14).

Code Sec. 41(a) provides an incremental tax credit for increasing research activities (research credit) based on a percentage of a taxpayer's qualified research expenses above a base amount. A taxpayer can apply the rules and credit rate percentages under Code Sec. 41(a)(1) to calculate the credit (commonly referred to as the regular credit) or a taxpayer can make an election to apply the alternative simplified credit (ASC) and credit rate percentages under Code Sec. 41(c)(5) to calculate the credit. Section 41(c)(5)(C) provides that an ASC election under Code Sec. 41(c)(5) applies to the tax year for which made and all succeeding tax years unless revoked with IRS.

In 2011, the IRS issued final regulations (T.D. 9528 (6/10/11)) on the election and calculation of the ASC. Reg. Sec. 1.41-9(b)(2) provides that a taxpayer makes an election under Code Sec. 41(c)(5) by completing the portion of Form 6765, Credit for Increasing Research Activities, relating to the ASC election, and attaching the completed form to the taxpayer's timely filed (including extensions) original return for the tax year to which the election applies. Reg. Sec. 1.41-9(b)(2) also provides that a taxpayer may not make an election under Code Sec. 41(c)(5) on an amended return and that no extension of time to make an election under Code Sec. 41(c)(5) will be granted.

After the issuance of the final regulations, the IRS received requests to amend the regulations to allow taxpayers to make an ASC election on an amended return. According to practitioners, the burden of substantiating expenditures and costs for the base period under the regular credit are costly, time-consuming, and difficult, and taxpayers often need additional time to determine whether to claim the regular credit or the ASC.

In response to these requests, the IRS has issued final regulations which remove the rule in Reg. Sec. 1.41-9(b)(2) prohibiting a taxpayer from making an ASC election for a tax year on an amended return. In its place, the IRS has issued temporary regulations that allow a taxpayer to make an ASC election for a tax year on an amended return.

However, the IRS said, 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. Accordingly, the temporary regulations provide that a taxpayer that previously claimed, on an original or amended return, a Code Sec. 41 credit for a tax year may not make an ASC election for that tax year on an amended return. In addition, the temporary regulations provide that a taxpayer that is a member of a controlled group in a tax year may not make an election under Code Sec. 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.

Compliance Tip: As with all claims under Code Sec. 41, taxpayers must maintain sufficient books and records to substantiate the credit on the amended returns.

For a discussion of the alternative simplified credit, see Parker Tax ¶104,905. (Staff Editor Parker Tax Publishing)

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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