News and Insights

Internal Revenue Service Expands Taxpayer Eligibility to Claim Alternative Simplified Research and Development Tax Credit

Tax Development Jun 03, 2014

With today’s release of new regulations in the Federal Register via Treasury Decision 9666, and by cross reference REG-133495-13, the Internal Revenue Service (IRS) has opened the door for taxpayers to elect the Alternative Simplified Credit (ASC) calculation on amended returns. This new rule removes prior restrictions placed on taxpayers, which limited the election of the ASC calculation of the research and experimentation tax credit (commonly known as the “R&D tax credit”) to timely filed returns.

Under prior regulations, on a timely filed return, taxpayers were provided the ability to evaluate both the regular and ASC calculation methodologies and elect the most beneficial calculation, whether from a taxpayer benefit standpoint or burden to substantiate standpoint. However, taxpayers were prohibited from electing the ASC calculation methodology on an amended return.

The ASC methodology provides that the credit for increasing research activities be calculated by comparing current year qualified expenses to that of the prior three tax years, whereas the regular calculation methodology requires the establishment of a historic “base” period, which in some cases involved substantiation of qualified expenses as far back as tax year 1984.

Each year numerous taxpayers either decline to claim the credit or do not claim the full credit that they are allowed due to this restriction. Specifically, as a result of the previous timely file requirement for the ASC election, many taxpayers were unable to claim a credit due to challenges in accurately quantifying and substantiating qualified activities under the regular credit calculation. Additionally, the requirement limited the time in which the taxpayers had to properly evaluate which calculation methodology would be most beneficial to the taxpayer.

The amendment to the rules relating to election of ASC significantly increases a taxpayer’s ability to claim and maximize the credit. The new regulations, which take effect today, expire June 2, 2017 and apply to elections with respect to taxable years ending on or after June 3, 2014. Taxpayers however may rely on the new regulations to make an election for a tax year ending prior to June 3, 2014 if the period is still open by statute so long as the taxpayer, or member of the taxpayer’s controlled group, has not previously claimed a research credit in the given tax year under the regular credit calculation.


Allea Newbold

Stephanie Shell-Condon