AIRC opportunities and new allocation regs.

• Author: Coughlan, J. Anthony
• Position: IRS regulations; alternative incremental research credit

There are two different research credit regimes under Sec. 41--the conventional research credit regime and the alternative incremental research credit (AIRC) regime. Under the former, a taxpayer may claim a credit equal to 20% of the excess of qualified research expenses (QREs) over the "base amount." The base amount equals the "fixed-base percentage" multiplied by the average annual gross receipts for the four years before the credit year. The fixed-base percentage generally is the percentage that the QREs for the period Jan. 1, 1984-Dec. 31, 1988 were of the taxpayer's gross receipts for the same period.

Congress enacted the AIRC in 1996 to benefit taxpayers unable to claim the conventional credit because of economic circumstances relative to the base period. Many businesses that continued to increase their research spending after the 1984-1988 base period found the conventional credit unusable, because they had rapidly growing sales. Under the AIRC, taxpayers can elect to calculate the research credit without reference only to the 1984-1988 base period. Instead, the credit is calculated with reference to the taxpayer's average annual gross receipts for the prior four tax years.

Revoking the AIRC Election

When Congress enacted the AIRC, taxpayers could elect it only in their first tax year beginning after June 30, 1996. In 1997, Congress provided that an AIRC election could be made in any tax year beginning after that date. Some taxpayers, however, elected the AIRC that first year. In hindsight, some of these companies should have remained under the conventional research credit regime. Because an AIRC election applies to all succeeding years (unless the IRs consents to its revocation), some taxpayers are "stuck" with an AIRC election they do not want; going back to the conventional credit regime would require the Service's consent.

In Letter Ruling 200016005, the IRs consented to a taxpayer's revocation of the AIRC. While the letter ruling does not set forth the IRS's rationale for consent, it appears reasonable to conclude that the presence of a "life event" increases the likelihood that the Service will agree to a revocation request. An example might be when a corporation that has elected the AIRC acquires a target corporation, resulting in a controlled group with a base amount considerably lower than the acquirer's. Because of this, the controlled group might be eligible for higher conventional research credits, possibly justifying...