Computing the research credit for consolidated groups.

• Author: Fairbanks, Greg A.

Sec. 41 offers a credit for increasing research activities. It is an incremental credit in that a taxpayer must have current-year qualified research expenses (QREs) that exceed a base amount in order to claim the credit. The base amount for taxpayers claiming the regular Sec. 41 credit (and neither the alternative incremental research credit nor the alternative simplified credit) is the product of the fixed base percentage and the average annual gross receipts for the four years preceding the current tax year. Thus, the credit itself is determined by a calculation that is dependent not only on current-year QREs but also prior years' activity. (Note that Sec. 41 has been extended through December 31, 2011, by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, P.L. 111-312.)

Sec. 41(f)(1) and Regs. Sec. 1.41-6 provide additional rules for computing the Sec. 41 credit for controlled groups of corporations and trades or businesses under common control. The rules are based upon determining that a controlled group of corporations exists (or a group of trades or businesses under common control) based upon application of the Sec. 1563(a) rules (or Regs. Sec. 1.52-1, respectively). The rules provide, in essence, that all members are treated as a single taxpayer, and a single research credit is calculated for the entire group. The credit is then apportioned to the group members. Thus, the computations regarding QREs, the fixed base percentage, and average annual gross receipts are determined by aggregating such amounts from the group members. Regs. Sec. 1.41-6(d) further provides that all members of a consolidated group are treated as a single member of a controlled group of corporations.

Acquisition of a Target Entity During the Tax Year

Sec. 41(f)(3)(A) provides a special rule for acquisitions, stating that when

a taxpayer acquires the major portion of a trade or business of another person (hereinafter in this paragraph referred to as the "predecessor") or the major portion of a separate unit of a trade or business of a predecessor, then, for purposes of applying this section for any taxable year ending after such acquisition, the amount of qualified research expenses paid or incurred by the taxpayer during periods before such acquisition shall be increased by so much of such expenses paid or incurred by the predecessor with respect to the acquired trade or business as is attributable to the portion of such trade or business or separate unit acquired by the taxpayers, and the gross receipts of the taxpayer for such periods shall be increased by so much of...