The research and development (R&D) tax credit has been extended through 2013 as part of the American Taxpayer Relief Act of 2012, and the legislation makes several modifications in how the credit is computed for controlled groups and how acquisitions are treated.
Controlled group allocations
The legislation modifies and simplifies 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, 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 standalone credit. This allocation methodology was particularly burdensome in some situations where group members were required to use different methods for computing their standalone credits.
Grant Thornton insight: The new law provides that the group credit will now be allocated to the group members based on the members' proportionate share of qualified research expenses (QREs). This change will likely be welcomed by taxpayers who have previously dealt with complex allocation calculations.
Acquisitions
The second technical change made by the bill deals with how taxpayers treat the acquisition of a major portion of a trade or business (or a separate unit thereof). Section 41 is modified to indicate that when a business is acquired, the acquiring entity includes only a proportionate share of QREs for the acquired business, reflecting the period after the acquisition, in the computation of the R&D credit for the year of the acquisition. Corresponding adjustments to QREs and gross receipts in the base years would similarly be prorated based on the number of days the acquired business was owned by the acquirer during the year of acquisition. For years after the acquisition, the full prior year QREs and gross receipts amounts for the acquired business would be included in the acquirer's base amount computations. Similar rules for the disposing entities were enacted that would allow "mirror image" adjustments to the disposing entity's base amount computations.
Grant Thornton insight: This change will primarily affect the treatment of asset acquisitions for R&D credit purposes. Under the prior rules, taxpayers may have included full year QRE amounts for acquired businesses (including pre-acquisition QREs) in the credit year calculations for the year of acquisition as well as 100% of the QREs and gross receipts in the base amount calculations. This created situations in which certain QREs were effectively "double counted" when included by both the disposing and acquiring entity in the year of the transaction. The new rules clarify the treatment of these acquisition and disposition adjustments.
Financial statements
For financial statement purposes, taxpayers will have to wait until their first-quarter 2013 filings to book their calendar year 2012 R&D credit benefit. Under GAAP, financial statements should reflect the tax laws that were enacted as of the balance sheet date of the relevant reporting period. Since the R&D credit extension wasn't enacted until Jan. 2, 2013, taxpayers cannot book their 2012 credit benefit for Dec. 31, 2012, tax provision purposes. Taxpayers should consider enhancing their financial statement disclosures to discuss the legislation's impact on income tax accounts.
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