Tax Alert Regarding the R&D Tax Credit
On June 2nd, 2014, the Internal Revenue Service made a significant change to the Section 41 Research & Development Tax Credit. Treasury released Treasury Decision (T.D.) 9666, which amends Reg. §1.41-9(b)(2), and allows taxpayers the opportunity to amend tax returns utilizing the Alternative Simplified Credit (“ASC”) methodology for calculating their Section 41 R&D tax credit. This opportunity is available to taxpayers who have not claimed the R&D credit in the past using another calculation methodology. Prior to this announcement, taxpayers could only claim the ASC methodology on a timely filed (including extensions) original tax return to which the election applies.
The ASC methodology only requires the taxpayer to determine the qualified research expenses (“QREs”) for the three years prior to the tax year being claimed versus the regular methodology, which could require the taxpayer to determine the QREs for years as far back as 1984.
What does this mean? Here’s an example case:
A manufacturer with $500,000 in qualifying expense in the current tax year would have $30,000 in federal R&D tax credits. Without the appropriate documentation from their base period, claiming credits for their open tax years would not have been possible. Even with support from Tax Credit Co., an ASC election could have only been made in the current tax year. Now, with TD 9666, it’s possible for the company to go back and elect the ASC method on their amended returns generating credits in those open tax years – driving their benefit from $30,000 for one year to over $100,000 for all open tax years.
T.D. 9666 is an important development for taxpayers that have not claimed the R&D credit. Due to cost and documentation requirements many taxpayers do not pursue the credit. These new regulations provide taxpayers with options for making the claim on amended returns, and capturing a refund.
The regulations apply to elections with respect to tax years ending on or after June 2, 2014. A taxpayer may apply the regulations to a tax year ending prior to June 2, 2014, if the taxpayer makes the ASC election before the statute of limitations for the tax period expires.
If you would like to know more about the R&D Tax Credit, and how Tax Credit Co. can help you, please contact us to null