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Final regs further liberalize amended return alternative simplified research credit election

T.D. 9712, 02/26/2015; Reg. § 1.41-9

IRS has issued final regs that allow taxpayers that did not claim a research credit on a previously filed return for a given tax year to elect the alternative simplified research credit (ASC) on an amended return for that year. The final regs replace, largely follow, and somewhat liberalize, temporary regs that were issued in 2014.

Background. For amounts paid or incurred before Jan. 1, 2015, the Code Sec. 41 research credit for a tax year is an amount equal to the sum of:

1. 20% of the excess (if any) of the qualified research expenses for the tax year over a base amount (Code Sec. 41(a)(1))—unless the taxpayer elects the ASC (Code Sec. 41(c)(5));
2. 20% of the basic research payments (the “university basic research credit”) determined under Code Sec. 41(e)(1)(A) (Code Sec. 41(a)(2)); and
3. 20% of certain amounts paid or incurred to an energy research consortium (the “energy research consortium credit”). (Code Sec. 41(a)(3))

Final regs had provided that: a) the election to use the ASC may not be made or revoked on an amended return, and may not be revoked except with IRS consent; and b), taxpayers will not be granted an extension of time to make or revoke an ASC election under Reg. § 301.9100-3 . (Reg. § 1.41-9(b)(2); Reg. § 1.41-9(b)(3))

In 2014, IRS issued temporary regs that provided a rule that allows a taxpayer to make an ASC election for a tax year on an amended return. Those regs provided 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, those regs provided 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. (Reg. § 1.41-9T(b)(2)) See Weekly Alert ¶  37  06/05/2014.

Code Sec. 280C(c)(3) allows a taxpayer to make an annual irrevocable election to claim a reduced research credit rather than reducing the Code Sec. 174 deduction (research and experimental expenditure deduction), as required by Code Sec. 280C(c)(1).

Final regs largely adopt, and somewhat liberalize, temporary regs. IRS has now issued final regs that adopt the temporary regs with the following changes:

…Substituted “Code Sec. 41(a)(1)” where “Code Sec. 41” and “research credit” appeared in the temporary regs. Thus, the final regs preclude those taxpayers that previously claimed, on an original or amended return, the Code Sec. 41(a)(1) credit, and not taxpayers who only claimed a Code Sec. 41(a)(2) or Code Sec. 41(a)(3) credit on an original or amended return, from making an ASC election for that tax year on an amended return. And, the final regs limit the above “member-of-a-controlled-group” rule to situations where any member of the controlled group for that year previously claimed the Code Sec. 41(a)(1) credit using a method other than the ASC on an original or amended return for that tax year. (Reg. § 1.41-9(b)(2))
…Clarified that the amended return ASC election is only available if the tax year is not closed by the statute of limitations on assessment under Code Sec. 6501(a). (Reg. § 1.41-9(b)(2))

In the preamble to the final regs, IRS also notes that, if a taxpayer is undecided whether to claim the research credit for a tax year but wants to preserve the operative effect of the Code Sec. 280C(c)(3) election for that tax year, then the taxpayer will make the Code Sec. 280C(c)(3) election on line 17 of Form 6765 (Credit for Increasing Research Activities), but leave the remaining section of the form blank. A Code Sec. 280C(c)(3) election on line 17 of Form 6765 made in a tax year does not, in and of itself, constitute a credit claim under Code Sec. 41(a)(1), and accordingly does not preclude a taxpayer from making an ASC election on an amended return for that tax year. (T.D. 9712, 02/26/2015)

RIA observation: The new regs make no change to the existing regs’ rules regarding revocation of the election via amended return and extension of time to make or revoke an ASC election.

Effective date. The new regs apply to elections with respect to tax years ending on or after Feb. 27, 2015. For tax years ending before Feb. 27, 2015, the above mentioned temporary reg, Reg. § 1.41-9T, applies. (Reg. § 1.41-9(d))

References: For the alternative simplified credit election under the research credit, see FTC 2d/FIN ¶  L-15302.2; United States Tax Reporter ¶  414.0107; TaxDesk ¶  384,003.1; TG ¶  15115.