Simplified Research Credit Can Now Be Elected on Amended Tax Returns

• Author: Shirley Dennis‐Escoffier
• DOI: http://doi.org/10.1002/jcaf.22010
• Published date: 01 November 2014
• Date: 01 November 2014

77

© 2014 Wiley Periodicals, Inc.

Published online in Wiley Online Library (wileyonlinelibrary.com).

DOI 10.1002/jcaf.22010

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Shirley Dennis-Escoffier

Simplified Research Credit Can Now Be

Elected on Amended Tax Returns

Since its enactment in 1981,

the federal research tax credit

has been available to businesses

that incur qualifying research

expenses; an alternative simpli-

fied version has been available

since 2007. Unfortunately, the

federal research tax credit is not

permanent and must be extended

each year by Congress. It was

last extended through Decem-

ber 31, 2013, and is expected to

be extended again retroactively

in the lame-duck session after

the election. While businesses

wait for another extension, the

Internal Revenue Service (IRS)

recently issued regulations allow-

ing businesses to elect to use

the alternative simplified credit

(ASC) on amended tax returns.

This is a significant change from

the regulations the IRS issued

in 2011, which clearly stated the

ASC could not be elected on

amended returns. Businesses

that believed the complex rules

were a deterrent to claiming any

research tax credit now have a

chance to revisit their decision.

BACKGROUND

Internal Revenue Code

(IRC) Section 41 provides a tax

credit for increasing research

activities that is computed

by using a percentage of the

taxpayer’s qualified research

expenses (QREs) above a base

amount. QREs can include

wages, contractor costs, and sup-

ply costs with wages typically

being the largest component for

most corporations. Qualifying

wages are usually for services

engaging in qualified research or

for directly supporting or super-

vising qualified research.

Under these complex rules,

the base amount is generally

determined by computing

the QREs as a percentage of

gross receipts during a fixed

base period. Next, the average

annual gross receipts for the last

four years are computed. The

base amount is the fixed base

percentage times these aver-

age annual gross receipts. The

minimum base amount must be

at least half of the taxpayer’s

QREs for the credit year, with

special rules provided for certain

start-up companies. The credit is

then computed as a percentage

of QREs in excess of this base

amount.

In 2007, Congress acknowl-

edged that many small businesses

were unable to realize substantial

benefits from the research credit

due to the stringent requirements

that existed and responded by

adding a simplified method of

computing the research credit

under IRC Section 41(c)(5). The

easier-to-calculate ASC focuses

only on QREs and leaves out

gross receipts. In addition, the

ASC includes a special provision

that allows businesses to take the

credit even if they do not have

QREs in all three of the preced-

ing tax years.

Under the ASC, a business

can claim 14% of the amount by

which the QREs exceed 50% of

the average QREs for the three

preceding tax years.

Example 1: Alpha, a

calendar-year corpora-

tion, has $220,000 of

QREs for 2013. For

the preceding three tax

years, Alpha’s annual

QREs were $60,000,

$70,000, and $110,000;

the average for these

three years is $80,000,

so 50% of this average

is $40,000. Alpha can

elect an alternative sim-

plified research credit