Treasury Releases Guidance on the Allocation of Research Credits Among Members of a Controlled Group
On April 2, 2015, the IRS issued TD 9717 regarding the allocation of the federal research credit among members of a controlled group (i.e., corporations and trades or businesses under common control). These new regulations implement the changes made as a result of the American Tax Relief Act of 2012 (Act) and affirms its own guidance (Notice 2013-20).
IRC § 41(f)(1) and Reg. § 1.41-6(c) provided that members of a controlled group are treated as a single taxpayer in calculating the federal research credit. These regulations provided a method of allocating a group research credit among the group members, and also provided that the controlled group credit was to be allocated to each member based on its proportion of the stand-alone credit.
On March 8, 2013, Notice 2013-20 was issued to provide guidance on the allocation of a controlled group’s research credit for years beginning after Dec. 31, 2011. This notice detailed the calculation method established by Section 301(c) of the Act and further provided that the member entity need only have QREs contributing to the group credit (regardless of whether it had a stand-alone credit).
Section 301(c) of the Act sought to significantly simplify (and make equitable) the allocation of the controlled group credit by eliminating the required stand-alone credit calculation for each member. It requires the calculation of a group credit, the allocation of which would be distributed to each member based on its proportionate share of the group’s qualified research expenses (QREs) and NOT on its proportionate share of stand-alone credits. Although the regulations were well-intentioned, the practical result was that members with QREs resulting in no stand-alone credits were not allocated any of the group credit, while other members of the controlled group received a disproportionate share of the group credit (i.e., credits derived from QREs it did not generate).
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