The IRS has released interim guidance (Notice 2013-20) on the allocation of the research and development (R&D) tax credit to members of a controlled group. The guidance was in response to modifications 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, 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 when group members were required to use different methods for computing their standalone credits. The new law provides that the group credit will now be allocated to the group members based on members' proportionate share of qualified research expenses (QREs).
For tax years beginning after Dec. 31, 2011, Notice 2013-20 indicates that the regulations dealing with the R&D credit allocations for controlled groups (Treas. Reg. Sec. 1.41-6(c) and related examples) no longer apply. Instead, taxpayers should allocate the credit based on their proportionate share of QREs as outlined in ATRA. The notice also indicates that the IRS intends to modify Treas. Reg. Sec. 1.41-6 to conform to the new allocation rules.
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