IRS Issues New Administrative Authority In Connection To Controlled Group Allocations Of The Research And Experimentation Tax Credit

The Internal Revenue Service (hereinafter “the Service”) has issued Notice 2013-20 in connection to the allocation of the Research and Experimentation Tax Credit (hereinafter “RTC”) to members of a controlled group. The guidance was in response to modifications made to I.R.C. § 41 as part of the American Taxpayer Relief Act of 2012 (hereinafter “ATRA”).

It should be duly recalled that the ATRA simplified the methodology for allocating the RTC to members of a controlled group of corporations and businesses under common control. Under the prior statute and corresponding treasury regulations, all companies under common control that were required to calculate the RTC at the group level were then required to allocate the RTC to the members of the group based upon each member’s standalone RTC. This allocation methodology was principally onerous when group members were required to use different methods for computing their standalone RTCs. The new law provides that the group RTC will now be allocated to the group members based on members’ proportionate share of Qualified Research Expenses (hereinafter “QREs”).

It should be duly noted that for tax years beginning after Dec. 31, 2011, Notice 2013-20 indicates that the treasury regulations dealing with the RTC allocations for controlled groups (e.g., Treas. Reg. §1.41-6(c) and related examples) no longer apply. In its place, taxpayers should allocate the RTC based on their proportionate share of QREs as outlined within the ATRA. Finally, the notice also indicates that the Service intends to modify Treas. Reg. § 1.41-6 to conform to the new allocation rules.

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About the Author

Peter J. Scalise serves as the National Partner-in-Charge and the Federal Tax Practice Leader for Engineered Tax Services. Peter is a highly distinguished BIG 4 Alumni Tax Practice Leader and has approximately twenty years of progressive public accounting experience developing, managing and leading multi-million dollar tax advisory practices on both a regional and national level.

Peter is also a renowned keynote speaker and author on specialty tax incentives, tax controversy matters, and legislative updates from Capitol Hill for NAREIT, USGBC, AICPA, ASTP, NATP, ABA, AIA, TEI and serves as a volunteer member of the iShade Tax Faculty. Peter serves on both the Board of Directors and Board of Editors for The American Society of Tax Professionals (“ASTP”) and is the Founding President and Chairman of The Northeastern Region Tax Roundtable, an operating division of ASTP

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