The IRS released proposed regulations on Wednesday that would simplify the procedures taxpayers must follow to claim the reduced research credit under IRC § 280C(c)(3).
Taxpayers who claim a credit under section 41 for increasing research expenses must reduce their research expense deduction under section 174 by the amount of the section 41 credit. Similarly, taxpayers who elect to capitalize research expenses must reduce the amount chargeable to the capital account for such expenses by the amount that the section 41 research credit exceeds the amount allowable as a deduction for research expenses.
Taxpayers can avoid reducing the deduction for research expenses or the amount charged to a capital account by making an election under section 280C(c)(3) to take a reduced research credit. The amount of the reduction equals the excess of the amount of the section 41 credit over the credit amount multiplied by the maximum corporate tax rate.
Under current regulations, taxpayers make the election to claim a reduced credit on their original tax return and, once made, the election is irrevocable for that tax year. The proposed regulations would allow taxpayers to make the election on Form 6765, Credit for Increasing Research Activities.
The proposed regulations also address whether members of a controlled group can make separate elections. Under the proposed regulations, each member of a controlled group would be able to make the election after the group section 41 credit had been calculated and allocated under the rules of Treas. Reg. §§ 1.41-6 and 1.41-6T.
The rules in the proposed regulations will be effective upon finalization.