Wipfli Alerts & Updates: IRS Amends Regulations To Allow Alternative Simplified Research Credit Election on Amended Returns


June 11, 2014
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Final and temporary regulations, TD 9666, passed on June 3, 2014 now allow some taxpayers to elect the alternative simplified credit (ASC) on an amended return for which the statute of limitations has not yet closed and the traditional credit method was not previously claimed. With the passage of this new regulation, taxpayers will have additional time to decide between claiming the regular credit method or the ASC credit method, which could be a costly decision if they choose the wrong credit method. Prior to this change, taxpayers could claim the ASC method only if it was elected on an originally and timely filed tax return.
 
Understanding the New Regulations
 
Typically, the burden of substantiating the costs and expenditures for the base period under the regular credit is more time-consuming, costly, and difficult if the records aren’t readily available or don’t even exist. The base period calculation under the ASC method is much simpler and easier to substantiate, which saves taxpayers time and money. This change allows taxpayers the opportunity not only to take the additional time to determine which credit method will provide the greater benefit, but also to elect the ASC method on an amended return based on a change in facts and circumstances that may not be known at the time of the filing of the tax return. Taxpayers may have benefits they aren’t aware of by being able to claim the ASC credit on an amended return.
 
There are two limitations within the new regulations, however. First, if a Section 41 research credit (regular credit) was claimed on a previously filed original or amended return, the taxpayer may not make an ASC election on an amended return. Second, if a taxpayer is a member of a controlled group in a tax period, any taxpayer within that controlled group may not make an election to claim the ASC credit for that tax period on an amended return if a method other than the ASC was claimed on an original or previously amended return.
 
Calculating the Credit
 
Since its enactment in 1981, the research and development tax credit has gone through many changes, and this is yet another one. There have been changes in how the credit is calculated and what activities and expenditures qualify for the tax credit. Currently, there are two methods used to determine the amount of research credit. The first calculation method is the traditional method.  Under this method the credit is a maximum of 20% of qualified costs in excess of a threshold amount determined based on gross receipts. The second method is the ASC method. This credit is equal to 14% of the qualified costs in excess of a threshold based on prior qualified expenses. Each situation is different, and both calculation methods need to be evaluated to determine which method provides the maximum credit benefit.
 
The definition of a qualified activity for the research credit includes not only the development of new products, but also improvements to products, processes, techniques, formulas, patents, and software applications. It includes more than just the activities that focus on the development of new, cutting-edge products or design standards for a particular industry niche. The research credit can apply to a variety of companies including manufacturers, software developers, engineers, design/build contractors, and architects. You may have research credit opportunity if your company:
  • Manufactures products
  • Develops new, improved, or more reliable products/processes/formulas
  • Develops prototypes and models, including computer-generated models
  • Designs tools, jigs, dies, molds, or fixtures
  • Designs products to customer specifications
  • Develops or applies for patents
  • Conducts new concept and technology testing
  • Develops new technology
  • Attempts to use new materials
  • Adds new equipment
  • Improves or builds new manufacturing facilities
  • Automates/streamlines internal processes
  • Develops software or hardware
  • Prepares feasibility studies
  • Incorporates new construction materials into building designs
  • Designs buildings to achieve a certain energy efficiency goal
  • Designs buildings with unique features or space plans
  • Develops temporary structures used in the construction process
 
Based on our experience, companies of all sizes and in various industries will benefit from the credit.  Businesses need to start planning now to ensure they identify the correct activities that qualify for the credit, as well as the corresponding expenses that will qualify. In addition, businesses need to ensure they have documentation that supports that the activities and expenses identified qualify for the credit. At Wipfli, we have a service line focused on this area that can assist you in this process and opportunity for your company.
 
Maximizing Your Opportunities
 
Proper understanding of the tax law can result in substantial savings. Wipfli’s dedicated team of tax professionals specializing in R&D tax law is ready to help you. Please contact Scott Schumacher, Valerie Fedie, Christopher Blaylock, Greta Heike or your Wipfli relationship executive for assistance. Visit our website to read additional articles or view a recorded webinar to learn more.
 

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