The IRS released final regulations (TD 9539) further simplifying an election method by which taxpayers may use a standard rate to reduce a research credit under IRC § 41 in lieu of reducing their research expense deductions. The final regulations also clarify how members of a controlled group may make the election. The final regulations adopt with some modification proposed regulations issued in 2009 (REG-130200-08).
Under IRC § 280C(c), a deduction in a tax year for qualified research expenses under section 41(b) or basic research expenses under section 41(e)(2) must be reduced by the credit amount for that tax year. Similarly, where those expenses are capitalized, the amount capitalized in that tax year must be reduced by the excess, if any, of the amount of the credit over the amount of such expenses otherwise allowable as a deduction. However, instead of either of those limitations, taxpayers may elect under section 280C(c)(3) to reduce their section 41 credit. The amount of the reduction equals the amount of the section 41 credit (without regard to section 280C(c)(3)) multiplied by the maximum corporate tax rate.
The statute provides that the election is irrevocable for the tax year in which it is made and may be made anytime up to the return filing deadline, including extensions. Previously, the regulations (Treas. Reg. § 1.280C-4(a)) had provided that the election was made by claiming the reduced credit on an original return for the tax year.
The new final regulations specify that the election must be made on Form 6765, Credit for Increasing Research Activities, filed with the original return.
Controlled groups. Under Treas. Reg. § 1.41-6, all members of a controlled group of corporations (or trades or businesses under common control) are treated as a single taxpayer, and the group credit amount is allocated to each member in proportion to the stand-alone entity credits of the members of the controlled group (if the group credit does not exceed the aggregate stand-alone credits of the group members). If the group credit exceeds the aggregate stand-alone credits, the excess is allocated to each member in proportion to its share of qualified research and other expenses for which the credit is claimed.
The final regulations provide that each member of a controlled group may make the election after the group credit is computed and allocated. One commentator was concerned about the administrative complexity of having each member of a controlled group make the election. Accordingly, the final rules clarify that a common parent of a consolidated group filing a consolidated return may make the election on behalf of all members of the group. The common parent must adequately identify the group members for which the election is being made on an attachment to its Form 6765.
The final regulations also add an example clarifying that a member of a controlled group may make the election on its original return even if it does not claim the credit. Otherwise, the member could be barred from making the election later if another member of the group determines that it had understated its qualified research expenses for the tax year, resulting in an increased group credit with a portion allocable to the nonelecting member.
The final regulations amend Treas. Reg. § 1.280C-4 and apply to tax years ending on or after July 27, 2011.
More from the JofA: