Background
The Alternative Simplified Credit (ASC) calculation was added by the Tax Relief and Health Care Act of 2006 and is available for tax years ending after December 31, 2006. The ASC allows a tax credit of up to 14% of a taxpayers excess qualified research expenses (QREs) over a base amount. The base amount is generally determined by the taxpayers prior 3 tax years. As a result, one of the largest benefits to taxpayers electing to use the ASC method is the documentation needed to support the ASC calculation is generally readily available. The ASC method avoids the requirement of having to locate documents which may be up to 25 years old in order to properly calculate and document the credit as needed under the other methods available to calculate the R&D credit.
Final Regulation
The final regulations are effective June 9, 2011 (T.D. 9528), and clarify certain aspects of how to elect and calculate the R&D credit using the ASC method. The final regulations generally adopted the proposed regulations issued in 2008 with only minor revisions. As provided under the 2008 proposed regulations, the ASC must be elected on a timely filed original return (including extensions), and may not be elected or revoked on an amended return. Further, an extension of time to make the election or revoke the election will not be granted under §301.9100-3. Please note, revocation of the ASC method, or any calculation method, in a future tax year is deemed to be granted when made on the future tax year’s timely filed original return (including extensions).
One noteworthy change contained in the final regulations is that short taxable year calculations will be prorated based on the number of days in the short tax year instead of based on the number of months as contained in the 2008 proposed regulations. This change helps to provide a more accurate short year calculation and removes uncertainty as to whether or not the partial month needs to be included, and if so, how to include it in the calculation. The second noteworthy change is the final regulations provide a limited exception to allow taxpayers to amend their open tax years if they had previously used the monthly basis to calculate the short year. Use of the daily proration may result in a larger benefit amount. This limited exception applies for open tax years ending after December 31, 2006, and before June 9, 2011.