TD 9401 – Explanation of Provisions
The primary objective of these temporary regulations is to provide guidance on the ASC under section 41(c)(5). The temporary regulations provide rules for the ASC similar to some of the rules relating to the AIRC as contained in § 1.41–8 of the current regulations. However, because there are also differences, such as the formula calculation for the ASC, the ASC rules are provided in a new § 1.41–9T. These final and temporary regulations also make conforming and clarifying changes to §§ 1.41–1, 1.41–6, and 1.41–8.
Section 1.41–9T provides that, at the election of the taxpayer, the credit determined under section 41(a)(1) equals the amount determined under the ASC under section 41(c)(5). Generally, a taxpayer may elect the ASC for any taxable year of the taxpayer ending after December 31, 2006. However, for certain transitional rules, see Division A, section 104(b)(3), (c)(2), and (c)(4) of the Act. Because the transitional rules are of limited duration and have already been described and implemented in the 2006 version of Form 6765, ‘‘Credit for Increasing Research Activities,’’ these regulations do not address the transitional rules.
The temporary regulations generally provide the same rules related to elections and revocations as those provided for the AIRC in § 1.41–8 in the current regulations. If a taxpayer makes an ASC election under section 41(c)(5), the election applies to the taxable year for which made and all subsequent taxable years unless revoked. An ASC election under section 41(c)(5) is made by completing the portion of Form 6765, ‘‘Credit for Increasing Research Activities,’’ (or successor form) relating to the election of the ASC, and attaching the completed form to the taxpayer’s timely filed (including extensions) original return for the taxable year to which the election applies. The election may not be revoked except with the consent of the Commissioner. A taxpayer is deemed to have requested, and to have been granted, the consent of the Commissioner to revoke the election if the taxpayer completes the portion of Form 6765 (or successor form) relating to the credit determined under section 41(a)(1) or the AIRC and attaches the completed form to the taxpayer’s timely filed (including extensions) original return for the year to which the revocation applies. As is the case with a revocation of an AIRC election under § 1.41–8, an election under section 41(c)(5) may not be made or revoked on an amended return. Accordingly, for purposes of further clarification, the temporary regulations also provide that an extension of time to make or revoke an election under section 41(c)(5) (and similarly, under section 41(c)(4)) will not be granted under § 301.9100–3.
In the case of a controlled group of corporations, all the members of which are not included on a single consolidated return, an election or revocation must be made by the designated member by satisfying the requirements described above. The election or revocation by the designated member is binding on all the members of the group for the credit year to which the election or revocation relates. If the designated member fails to timely make or revoke an election, each member of the group must compute the group credit using the method used to compute the group credit for the immediately preceding credit year.
The term designated member means that member of the group that is allocated the greatest amount of the group credit under § 1.41–6(c) based on the amount of credit reported on the original timely-filed Federal income tax return (even if that member subsequently is determined not to be the designated member). If the members of a group compute the group credit using different methods (the method described in section 41(a), the AIRC method, or the ASC method) and at least two members of the group qualify as the designated member, then the term designated member means that member that computes the group credit using the method that yields the greatest group credit.
The temporary regulations provide several special rules. Section 1.41–9T(c) provides that unless a taxpayer has QREs in each of the three taxable years preceding the taxable year for which the credit is being determined, the credit equals the percentage of the QREs for the taxable year provided by section 41(c)(5)(B)(ii).
The temporary regulations also provide special rules relating to consistency and short taxable years. The temporary regulations provide that in computing the credit, QREs for the three taxable years preceding the credit year must be determined on a basis consistent with the definition of QREs for the credit year, without regard to the law in effect for the three taxable years preceding the credit year. This consistency requirement applies even if the period for filing a claim for credit or refund has expired for any of the three taxable years preceding the credit year. The regulations also provide special rules similar to the rules in § 1.41–3(b) of the existing regulations for taxpayers that have a short taxable year. If one or more of the three taxable years preceding the credit year is a short taxable year, then the QREs for such year are deemed to be equal to the QREs actually paid or incurred in that year multiplied by 12 and divided by the number of months in that year. Additionally, the temporary regulations provide that if a credit year is a short taxable year, then the average QREs for the three taxable years preceding the credit year are modified by multiplying that amount by the number of months in the short taxable year and dividing the result by 12.
The regulations also clarify that the average QREs for the three taxable years preceding the taxable year for which credit is being determined will be considered the base amount for purposes of the computation under section 41(h)(2). Therefore, if the research credit expires during the credit year, the average QREs for the three taxable years preceding the credit are multiplied by the ratio of the number of days for which the research credit is effective to the total number of days in the credit year.
The Treasury Department and the IRS note that the rules generally applicable under section 6001 provide sufficient detail about required documentary substantiation for purposes of the research credit. Section 1.6001–1 requires the keeping of records ‘‘sufficient to establish the amount of * * * * * required to be shown* * *.’’ The IRS may deny the credit for failure to provide sufficient records substantiating the claimed credit for any method used in determining the research credit.
