The IRS issued temporary regulations on election and calculation of the alternative simplified research credit (ASC) under section 41(c)(5), which became effective generally for tax years ending after 2006. Under the ASC, the credit generally equals 12 percent of so much of the taxpayer's qualified research expenditures (QREs) for the calculation tax year as exceeds 50 percent of the average QREs for the three preceding tax years.
The new regulations provide important guidance regarding ASC elections and revocations, as well as calculating the credit for short tax years or for tax years during which the credit lapses. All section 41 credit provisions terminated for amounts paid after 2007; bills to restore the credit retroactively are pending in Congress
The temporary regulations generally provide the same rules related to elections and revocations as those provided for the alternative incremental research credit (AIRC) in Reg. sec. 1.41-8.
An ASC election applies to the tax year for which made and all succeeding tax years unless revoked with IRS consent (as described below).
The ASC election is made by completing the applicable portion of Form 6765, Credit for Increasing Research Activities, and attaching the completed form to the taxpayer's timely filed (including extensions) original return for the tax year to which the election applies.
For a controlled group of corporations, all the members of which are not included on a single consolidated return, an election or revocation must be made by the designated member and is binding on all the members of the group for the credit year to which the election or revocation relates. If the designated member fails to timely make or revoke an election, each member of the group must compute the group credit using the method used to compute the group credit for the immediately preceding credit year.
The regulations provide that a taxpayer is deemed to have requested, and to have been granted, IRS consent to revoke an ASC election if the taxpayer completes the portion of Form 6765 relating to the credit determined under the Regular Credit or the AIRC and attaches the completed form to the taxpayer’s timely filed (including extensions) original return for the year to which the revocation applies. As is the case with a revocation of an AIRC election under Reg. sec. 1.41-8, an ASC election under section 41(c)(5) may not be made or revoked on an amended return.
Observation : Significantly, even though the ASC is a dramatically different method of calculating the credit and was the subject of little transitional guidance, the temporary regulations provide that an extension of time to make or revoke an election under section 41(c)(5) (and similarly, under section 41(c)(4)) will not be granted under Reg. sec. 301.9100-3.
The temporary regulations include several special rules :