Final Regulations (T.D. 9712, RIN 1545-BL78), providing taxpayers the ability to elect the Alternative Simplified Credit (ASC) calculation on amended returns, were published in the Federal Register on February 27, 2015. These regulations adopt the June 2014 proposed (REG-133495-13) and temporary (TD 9666) regulations. The final regulations remove prior restrictions placed on taxpayers that 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.
The ASC calculation 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. Conversely, 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.
Under the prior final regulations issued in June 2011, taxpayers were provided the ability to evaluate both the regular and ASC calculation methodologies and elect, on a timely filed return, the most beneficial calculation, whether from a taxpayer benefit or burden to substantiate standpoint. However, taxpayers were prohibited from electing the ASC calculation methodology on an amended return.
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 during the base period of 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 newly issued final regulations significantly increase taxpayer ability to claim and maximize the credit. The new regulations, which took effect February 27th, apply to elections with respect to taxable years ending on or after February 27, 2015. Taxpayers, however, may rely on the new regulations to make an election for a tax year ending prior to February 27, 2015, if the period is still open by statute, and 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.
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