Final regs. simplify reduced research credit election.

• Author: Nevius, Alistair M.

The IRS released final regulations (T.D. 9539) that further simplify an election method by which taxpayers may use a standard rate to reduce a research credit under Sec. 41 in lieu of reducing their research expense deductions. The final regulations also clarify how members of a controlled group may make the election. The final regulations adopt with some modification proposed regulations issued in 2009 (REG-130200-08).

Under Sec. 280C(c), a deduction in a tax year for qualified research expenses under Sec. 41(b) or basic research expenses under Sec. 41(e)(2) must be reduced by the credit amount for that tax year. Similarly, where those expenses are capitalized, the amount capitalized in that tax year must be reduced by the excess, if any, of the amount of the credit over the amount of such expenses otherwise allowable as a deduction. However, instead of either of those limitations, taxpayers may elect under Sec. 280C(c)(3) to reduce their Sec. 41 credit. The amount of the reduction equals the excess of the amount of the Sec. 41 credit over the credit amount multiplied by the maximum corporate tax rate.

The statute provides that the election is irrevocable for the tax year in which it is made and may be made anytime up to the return filing deadline, including extensions. Until now, the regulations (Regs. Sec. 1.280C-4(a)) had provided that the election was made by claiming the reduced credit on an original return for the tax year.

The new final regulations specify that the election must be made on Form 6765, Credit for Increasing Research Activities, filed with the original return.

Controlled Groups

Under Regs. Sec. 1.41-6, all members of a controlled group of corporations (or trades or...