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The tax credit for research and development can provide a valuable tax benefit to taxpayers in a variety of industries. A recent change by the IRS has now made the credit more widely available.

Background

There are two methods taxpayers can use to compute and claim the available credit.

These are the “regular” credit and the “Alternative Simplified Credit” (or ASC). The regular credit was originally the only one available to taxpayers. Congress later added the ASC to make the credit calculation less burdensome.

However, IRS rules provided that only the regular credit could be used on an amended return filed to claim the credit.

Recent Development

The IRS recently announced it had received numerous requests to amend its regulations, and allow taxpayers to make an ASC election on an amended return. The requests explained that the burden of substantiating expenditures and costs for the base period under the regular credit approach were costly, time-consuming, and difficult. The requests also suggested that taxpayers often needed additional time to determine whether to claim the regular credit or the ASC.

In TD 9666, the IRS responded to these requests by changing the applicable regulations. The IRS removed the rule that prohibited a taxpayer from making an ASC election for a tax year on an amended return. In its place, the regulations now provide a rule that allows a taxpayer to make an ASC election for a tax year on an amended return. 

Comment

There are certain restrictions placed on this new taxpayer option that should be reviewed prior to any filing. In changing the rules, the IRS also noted that taxpayers must still maintain sufficient books and records to substantiate the credit on any amended return.

In general, however, the new rule will make it far easier for companies to file amended returns to claim the tax credit. This could be especially beneficial to smaller companies, which may find the requirements of the regular credit calculation too onerous. As suggested by its name, the requirements of the ASC method are less complex than the regular method, which had been the only approach available for an amended return. 

 Legislative Origins

Interestingly, this IRS change was also advocated in legislation introduced by U.S. Senator Chris Coons (D-Del.) and U.S. Senator Pat Roberts (R-Kan.) These Senators included this change in the bipartisan “Innovators Job Creation Act”, which was introduced earlier this year.

“I am glad the IRS agrees with me that small businesses, the most dynamic part of our economy, should be able to take fuller advantage of the Research and Development Tax Credit,” commented Senator Roberts. “The sensible change in the IRS’ regulations – a change I have long pushed for – will provide funds to allow innovative small business owners to create new jobs, expand businesses and keep businesses growing.”

Senator Coons added that “Research and development are the lifeblood of innovation, and many of today’s most successful innovations are coming from the small business world. Our tax code should encourage job-creating R&D, but until now, IRS regulations prevented many small companies from claiming the most user-friendly version of the R&D tax credit. This simple change will help thousands of small manufacturers access the capital they need to invest in innovation, grow their businesses, and create good jobs. I’m grateful to Senator Roberts for his partnership on the Innovators Job Creation Act, and look forward to working with him to enact the other important provisions of this bill.”

For more information regarding this topic, please contact your local UHY LLP professional.