The new Alternative Simplified Credit is first available for tax years beginning in 2007. For many companies the ASC may make it easier to calculate the credit.
Taxpayers can elect the ASC for qualified research expenditures (“QREs”). The ASC equals 14 percent (for 2016) of the QRE for taxable years that exceed 50% of the average QRE for the three taxable years preceding the credit determination year. If the taxpayer has no QRE in any one of the three preceding tax years, the rate of the ASC equals 6 percent of the QRE for the credit determination year. Unlike the Regular Research Credit (“RRC”), the ASC does not have a minimum base amount equal to 50 percent of the credit determination year QRE.
With the introduction of the ASC, many taxpayers may benefit from the removal of the traditional “base Period” (generally the tax years between 1984-1988) and the research intensity approach (the relation of the QREs to gross receipts). This will allow ASC taxpayers to measure the credit solely on the calculation of incremental QREs. The new calculation method will be particularly important for taxpayers with:
Calculating and substantiating the Research Credit can be a cumbersome task. Election of the ASC, although binding, will relieve much of this administrative burden by shifting the measurement of research incrementally over the three prior years. This is a key consideration for taxpayers unable to claim the reinstated Research Credit because their current R&D intensity is lower than during the Credit’s 1984-1988 base period.
For some taxpayers, one key benefit in calculating the ASC is the removal of gross receipts from the equation, if their facts reflect a rising revenue stream. Many manufacturing and high tech companies especially will benefit from this change if their facts reflect a limitation in the amount of Credit available to them due to a shift in the relationship of QREs to gross receipts from the base period to current years. During 1984-1988, it was common for manufacturing companies, in particular taxpayers in the government contracting industry, to spend significant amounts of money on R&D in relation to sales in those same years. As these companies have increased research expenditures through the development of more efficient, cost effective processes over the years, the relative sales may have increased faster than the increase in research spending. As a result, the ratio of QREs to gross receipts has been decreasing, effectively limiting the amount of credit available under the Research Tax Credit.