Tax News

CCH (cch.taxgroup.com) reports:

 
The IRS has issued final, temporary and proposed regulations relating to the election and calculation of the alternative simplified credit under Code Sec. 41(c)(5). These regulations implement changes to the Code Sec. 41 credit for increasing research activities made by the Tax Relief and Health Care Act of 2006 (P.L. 109-432).

Background

 
Code Sec. 41(a) provides an incremental tax credit for increasing research activity based on a percentage of a taxpayer's qualified research expenses (QREs) above a base amount. P.L. 109-432 added a third method of computation that taxpayers could elect to use in computing the amount of the research credit. Thus, in addition to the regular credit and the alternative incremental credit (AIRC), a taxpayer could elect to compute the research credit under the alternative simplified credit method in Code Sec. 41(c)(5).

  Under this method, the credit determined under Code Sec. 41(a)(1) is equal to 12 percent of so much of the QREs for the tax year as exceeds 50 percent of the average QREs for the three tax years preceding the tax year for which the credit is being determined. The credit is equal to six percent of the QREs for the tax year if the taxpayer does not have QREs in each of the three tax years preceding the year for which the credit is being determined. This election applies to the tax year for which it was made and all succeeding tax years unless it is revoked with the consent of the IRS.

Temporary Regulations

  If ASC treatment is elected, the credit determined under Code Sec. 41(a)(1) equals the amount determined under the ASC under Code Sec. 41(c)(5). The temporary rules generally parallel the rules related to elections and revocations under the AIRC regulations. Specific rules and definitions for elections in the case of a controlled group of corporations are provided.

  The temporary regulations include several special rules for taxpayers that do not have QREs in each of the three tax years preceding the year for which the credit is being determined, and clarify that the average QREs for the three tax years preceding the year for which credit is being determined will be considered the base amount for purposes of the computation under Code Sec. 41(h)(2). Thus, if the research credit expires during the credit year, the average QREs for the three tax years preceding the credit are multiplied by the ratio of the number of days for which the research credit is effective to the total number of days in the credit year.

  Special rules are also provided with respect to consistency and short tax years. Moreover, if one or more of the three tax years preceding the credit year is a short tax year, then the QREs for that year are deemed to be equal to the QREs actually paid or incurred in that year multiplied by 12 and divided by the number of months in that short year. However, if the credit year is a short year, then the QREs for the three tax years preceding the credit year are modified by multiplying that amount by the number of months in the short tax year and dividing the result by 12.

Proposed Regulations

  The text of the temporary regulations also serves as the text of proposed regulations A public hearing on the proposed regulations is scheduled for September 25, 2008. Written or electronic comments must be received by September 15, 2008.

T.D. 9401, 2008FED ¶47,037

Proposed Regulations, NPRM REG-149405-07, 2008FED ¶49,806

Other References:

 
Code Sec. 41

  CCH Reference - 2008FED ¶4351

  CCH Reference - 2008FED ¶4351C

  CCH Reference - 2008FED ¶4351F

  CCH Reference - 2008FED ¶4359

  CCH Reference - 2008FED ¶4359F

  CCH Reference - 2008FED ¶4360

  CCH Reference - 2008FED ¶4360A

  CCH Reference - 2008FED ¶4360AD

  CCH Reference - 2008FED ¶4360AG

  CCH Reference - 2008FED ¶4360AJ

  Tax Research Consultant

  CCH Reference - TRC BUSEXP: 54,164.10
CCH Reference - TRC BUSEXP: 54,164.15