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R&D Tax Credit Rule Change is Welcome News for Manufacturers

On June 3, the IRS surprised taxpayers when it announced a significant change to the research tax credit regulations relating to the election of the alternative simplified credit (ASC). The rule change, which is effective immediately, allows taxpayers to make an ASC election on an amended return for a previously filed tax year.

In June of 2011, the Treasury Department and the IRS published final regulations relating to the election and calculation of the alternative simplified credit. Accordingly, Treasury regulation §1.41-9(b)(2) stated that a taxpayer may not make an election under section 41(c)(5) on an amended return and that an extension of time to make an election under section 41(c)(5) will not be granted under §301.9100-3.

Following the publication of the final regulations, the Treasury Department and the IRS received numerous requests to amend the regulations to allow taxpayers to make an ASC election on an amended return. The requests explained that the burden of substantiating expenditures and costs for the base period under the regular credit can be costly, time consuming, and difficult, and suggested that taxpayers often need additional time to determine whether to claim the regular credit or the ASC.

In response to these requests, the Treasury Department and the IRS agreed to remove the rule in §1.41-9(b)(2), thereby allowing taxpayers to make an ASC election on an amended return. The regulation change; however, does not allow a taxpayer who had previously claimed a credit using the regular credit method on an original or amended return to make an ASC election for that tax year on an amended return. In addition, the revised regulations provide that a taxpayer that is a member of a controlled group may not make an 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.

Example: We were introduced recently to a manufacturing company that had begun development of industrial furnace components back in the 1940s. Because the company had disposed of its older financial documents relating to the 1984-1988 base period, the regular credit method for computing the research credit could not be used, and as such the company was limited to claiming a $47,000 R&D credit using the alternative simplified credit (ASC) method for tax year 2013 only. The revised regulations; however, will allow the company to recover an additional $140,000 of R&D credits by filing amended returns for tax years 2010, 2011 and 2012.

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