On June 2, 2014, the Department of Treasury & IRS released for publication in the Federal Register temporary regulations (T.D. 9666) and, by cross-reference, proposed regulations (REG-133495-13) that effectively allowed for the Alternative Simplified Credit (ASC) election to be applied to amended returns. Section 41 allows for two methods of calculating the research tax credit: the “regular credit” calculation and the “ASC election” calculation.
Prior to this new proposed regulation, the ASC election, which is most commonly utilized by our clients, was an election that must be made on timely filed returns (including extension) only. That is, a taxpayer could not make an election under section 41(c)(5) on an amended return.
This new regulation from the Department of Treasury comes after several requests from multiple taxpayers to do away with the disallowance of the ASC election on amended returns. The taxpayers mainly complained that in taking steps to claim the research tax credit, the process became costly and difficult. More importantly, the process became time-consuming, which further resulted in taxpayers needing extra time to decide which of the two elections they would make.
Taxpayers can now enjoy the benefit of electing the ASC on amended returns. However, this election is only allowed on amended returns for tax years where the taxpayer did not previously receive the Section 41 research tax credit under the traditional method.
Furthermore, if a taxpayer is a subsidiary, and any other subsidiary under the same parent company claimed the tax credit, the taxpayer is not allowed to amend its return for a tax year where any other subsidiary claimed the credit. This applies only if the other subsidiary previously used any method other than the ASC election calculation.
The Department of Treasury did not alter the method by which to substantiate the credit, so taxpayers must still maintain business records and books at the same level of sufficiency required prior to this regulation. Finally, this regulation expires in June 2017.
Our clients will benefit from these new regulations from extended deadlines to necessary to prepare calculations and paperwork. A potential downside, on the other hand, where a client files an amended return including the ASC may be subject to an audit of both returns from the IRS.
Overall, this regulation is a victory for Braithwaite Global in providing its research tax credit services because it is a victory for its clients. Part of our service includes keeping our clients abreast on recent developments in the very complex field of tax law while ensuring that our clients can continue to use changes in the regulations to take advantage of the benefits provided by the Service.
Braithwaite Global Inc. is an independent firm providing R&D tax credit recovery expertise to leading Fortune 500 companies for over 30 years. With offices in the U.S., Canada, United Kingdom, Ireland, France and Brazil our comprehensive services include: R&D tax credit recovery, documentation support, planning, claiming, training, audit support and advocacy.