TD 9401 – Background
This document amends 26 CFR part 1 to provide rules relating to the alternative simplified credit (ASC), which may be elected under section 41(c)(5) of the Internal Revenue Code (Code).
General Overview
Section 41(a) provides an incremental tax credit for increasing research activities (research credit), and is based on a percentage of a taxpayer’s qualified research expenses (QREs) above a base amount. The Tax Relief and Health Care Act of 2006 (Pub. L. 109–432, 120 Stat. 2922, December 20, 2006) (the Act) made certain changes to the research credit, including the addition of another method of computation that taxpayers may elect to use in computing the amount of the research credit. The relevant Act provisions are effective generally for tax years after December 31, 2006, but provide certain transitional rules for fiscal year taxpayers.
Prior to the Act changes, there were two ways a taxpayer could determine the research credit under section 41(a). One way, commonly referred to as the regular credit, is determined by following the rules and percentages stated under section 41(a)(1). Under the regular credit, the base amount is generally determined with reference to the gross receipts of the taxpayer for the four prior taxable years preceding the taxable year in which credit is being determined (credit year) and the QREs and gross receipts over the five-year base period from 1984–1988. The base amount cannot be less than 50 percent of the taxpayer’s QREs for the credit year. Special rules are provided for certain start-up companies.
The second way a taxpayer could compute the research credit prior to the Act was to elect, in lieu of the regular credit, the alternative incremental credit (AIRC) under section 41(c)(4). Under the AIRC, the base amount is determined with reference to the gross receipts of the taxpayer for the four prior taxable years.
The Act added a third way, the ASC, under section 41(c)(5), which a taxpayer may elect to compute the research credit. Section 41(c)(5)(A) provides the general rule that, at the election of the taxpayer, the credit determined under section 41(a)(1) shall be equal to 12 percent of so much of the QREs for the taxable year as exceeds 50 percent of the average QREs for the three taxable years preceding the taxable year for which the credit is being determined. Section 41(c)(5)(B) provides a special rule that the credit shall be equal to 6 percent of the QREs for the taxable year if the taxpayer does not have QREs in each of the three taxable years preceding the year for which credit is being determined.
Section 41(c)(5)(C) provides that an ASC election under section 41(c)(5) shall apply to the taxable year for which made and all succeeding taxable years unless revoked with the consent of the Secretary. It further provides that an ASC election under section 41(c)(5) may not be made for any taxable year to which an AIRC election under section 41(c)(4) applies.
