IRS provides final and temporary regulations on controlled group allocation of R&D credit

Tax Hot Topics The IRS has provided final and temporary regulations (T.D. 9717) on the allocation of the research and development (R&D) tax credit to members of a controlled group. The regulations generally adopt the interim guidance issued in Notice 2013-20.

The new guidance updates the existing regulations to account for the changes made to Section 41 as part of the American Taxpayer Relief Act of 2012 (ATRA). ATRA simplified the methodology for allocating the credit to members of a controlled group of corporations and businesses under common control. Under the prior statute and associated regulations groups (Treas. Reg. Sec. 1.41-6(c) and related examples), all companies under common control that were required to calculate the credit at the group level were then required to allocate the credit to the members of the group based on each member’s stand-alone credit. This allocation methodology was particularly burdensome when group members were required to use different methods for computing their stand-alone credits. ATRA provides that the group credit will now be allocated to the group members based on members’ proportionate share of qualified research expenses (QREs).

Notice 2013-20 was issued in early 2013 to implement the ATRA changes before the regulations changed. It provided that the prior regulations dealing with the R&D credit allocations for controlled groups no longer applied and that taxpayers should allocate the credit based on their proportionate share of QREs as outlined in ATRA. The IRS is now replacing the previous regulations with new final and temporary regulations based on the guidance from Notice 2013-20.

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