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8.7.1.4
(11-06-2007)
Credit for Increasing Research Activities, IRC 41
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The research credit is a nonrefundable credit generally allowed for a percentage of expenditures paid or incurred for qualified
research. See IRC 41, Credit for Increasing Research Activities, for details.
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The research credit was first enacted in the Economic Recovery Tax Act of 1981 as IRC 44F. Major revisions were made by the
Tax Reform Act of 1984 and the section was redesignated as IRC 30 and again by the Deficit Reduction Act of 1986 when it
was redesignated as IRC 41, where the authority remains today.
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The research credit is not a permanent credit. It has been extended numerous times through December 31, 2005, with one gap:
no credit is allowed for expenditures incurred between June 30, 1995 and July 1, 1996.
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Currently, the research credit is not allowed for amounts paid or incurred after December 31, 2005. However, pending legislation
may allow the research credit for later expenditures.
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Use care to ensure the correct law is applied when computing the research credit for any taxable year.
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See the Research Credit web site at http://lmsb.irs.gov/hq/pftg/research/index.asp for further information.
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Form 6765, Credit from Increasing Research Activities, provides for the various computations of the research credit, the reduced
credit and the amount of the suspended research credit. Refer to the corresponding revision of the form and instructions for
the applicable taxable year.
8.7.1.4.1
(11-06-2007)
Research Credit as Component of General Business Credit
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The Tax Reform Act of 1986 added the research credit to the general business credit (GBC) for years beginning after 1985.
Prior to that it was a stand-alone credit. As part of GBC, it is subject to the carryback and carryforward provisions of
IRC 39(a).
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Special rules apply where both the credit and a deduction is claimed for the same research expenditures.
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IRC 280C(c)(1) provides that no deduction is allowed for that portion of the qualified research expenses otherwise allowable
as a deduction for the taxable year which is equal to the amount of the credit determined for such taxable year.
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The taxpayer must reduce deductions by the amount of the credit computed, regardless of whether the taxpayer is able to utilize
the full credit in the credit computation year, unless the taxpayer elects a reduced research credit pursuant to IRC 280C(c)(3).
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This is a yearly election and may be claimed only on an original timely filed return (with extensions).
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See IRC 280C(c) for details and prior law.
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Appeals Officers or Appeals Team Case Leaders must take IRC 280C into consideration when providing the Tax Computation Specialist
with the adjustments to the research expenditures and the research credit.
8.7.1.4.2
(11-06-2007)
Research Credit Suspension
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The Tax Relief Act of 1999 provides for two suspension periods for the research credit. As a result, credit arising from these
suspension periods cannot be taken into account on original returns.
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First suspension period is July 1, 1999 – September 30, 2000: The credit cannot be taken into account prior to the later of
October 1, 2000 or the date the return (which includes all or part of the first suspension period) is considered filed, including
approved extensions.
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Second suspension period is October 1, 2000 – September 30, 2001: The credit cannot be taken into account prior to the later
of October 1, 2001 or the date the return (which includes all or part of the second suspension period) is considered filed,
including approved extensions.
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No credit involving the two suspension periods may be claimed on a timely filed or late filed original income tax return,
even if that original return is filed after the expiration of such suspension period. The amount can only be claimed on a
Form 1040X/ Form 1120X or a Form 1045/ Form 1139.
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Further, any claim for refund of an overpayment of tax attributable to a research credit suspension period cannot be filed
before the expiration of the applicable suspension period or before the date the original return for the applicable taxable
year is filed.
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See Notice 2001-1 and IRM 21.7.4 for additional information on research credit suspension periods.
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To determine the amount of the credit that is suspended, the taxpayer must first calculate the research credit for the taxable
year.
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Because the research credit suspension periods merely delay the use of research credits attributable to a research credit
suspension period, the limitations contained in IRC 38(c), IRC 39, and IRC 41(g) on the amounts of research credit allowable
to any person as a credit against tax for any taxable year remain applicable.
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Further, taxpayers not electing to take a reduced credit under IRC 280C(c)(3) must continue to reduce applicable deductions,
amounts chargeable to capital account, and credits for the taxable year by the full amount of the research credit as required
by IRC 280(C)(c)(1) and IRC 280(C)(c)(2).
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The amount of the total credit that is suspended is based solely on the number of months in the fiscal year before the suspension
date (October 1, 2000 or October 1, 2001) and the number of months after the suspension date, not on the dollar amounts incurred
for qualified research activity during the suspension periods. Any adjustment to the credit amount is to be allocated to the
different periods before and after the suspension date. See the examples below:
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Example 1: If the taxpayer’s fiscal year runs from April 1, 1999 through March 31, 2000 and the taxpayer has a $10,000 research credit,
$2,500 (25% = 3 months for April, May & June out of 12 months) is allowable on the original return and the remaining $7,500
is suspended until October 1, 2000 (the months covering July through March involve a suspension period). The taxpayer can
file a claim for the $7,500 credit that was suspended on or after October 1, 2000.
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Example 2: If the taxpayer’s fiscal year runs from December 1, 1999 through November 30, 2000 and the taxpayer has a $10,000 research
credit, no credit is allowable on the original return because all 12 months involve the first or second suspension period.
The taxpayer can file a claim for $8,300 (83% = 10 out of the 12 months involved in the first suspension period, December
1999 through September 2000) after their return is filed for the period ending November 30, 2000; and the taxpayer can file
a claim for the remaining $1,700 (second suspension period for October and November 2000) on or after October 1, 2001.
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Example 3: If the taxpayer files a calendar year return for the year 2001 and the taxpayer has a $50,000 research credit, $12,500 (25%
= 3 months for October, November & December out of 12 months) is allowable on the original return. Even though the due date
of the original return (3/15/2002) is after the date the second suspension period expires (10/01/2001), the taxpayer cannot
claim the suspended portion of the credit on their original return. The taxpayer can file a claim for the $37,500 suspended
credit anytime after they file their original return.
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Any research credit not allowed in the taxable year that is attributable to a research credit suspension period may not be
claimed as a carryback or carryforward until the day after the end of the applicable research credit suspension period. After
the end of the applicable research credit suspension period, however, research credits attributable to a research credit suspension
period not used currently as a credit against tax may be carried to other taxable years under the rules of IRC 39.
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During these suspension periods, the research credit is not used to determine any amount required to be paid for any purpose
under the Internal Revenue Code. This restriction extends to the determination of underpayments for the computation of penalties
and additions to tax.
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In general, additions to tax for failure to pay estimated tax are made under IRC 6654 or IRC 6655 for any underpayment of
income tax imposed by the Code even if the underpayment is created or increased because of the suspension of the research
credit. No additions to tax for failure to pay estimated tax, however, are made for any period before July 1, 1999, for any
underpayment of income tax imposed by the Internal Revenue Code to the extent the underpayment is created or increased by
reason of the suspension of the research credit. See Notice 2001-2.
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In determining estimated tax payments, a credit created by a claim for research credit can only be applied to an estimated
tax payment that is due after the suspension period expires. An example of this is a credit attributable to the second suspension
period cannot be used to reduce any estimated tax payment due before October 1, 2001.
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Since the taxpayer can apply a credit from a suspension period to an estimated tax payment, pay special attention to the preparation
of Sequa Worksheets for interest computations.
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The suspension periods also affect the availability dates (e.g. interest computation date) of credits/abatements against the
taxpayer’s tax liability, and must therefore be taken into consideration when preparing Form 2285 for restricted interest
computations.
8.7.1.4.3
(11-06-2007)
Preparing Settlement Computations Involving Research Credit
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These procedures are used by the Appeals employee preparing the settlement computations (AO or TCS).
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To prepare Form 3610:
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Complete the top portion of the Form 3610 following normal procedures shown in IRM 8.2.1, General Settlement and Rule 155
Computations.
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Include restricted interest information, if applicable, on Form 3610.
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Determine whether any of the suspension periods apply, and if so, notate this on Form 3610.
For Example:The computation of interest on the adjustment to research credits pertaining to tax year 1999 include research credit suspension
periods require restricted interest as noted above.
7/1/1999 - 12/31/1999 = 6 months suspended in the 12 month period
It is also determined the deficiency for the taxable year 1999 is a large corporate underpayment under IRC 6621(c). Accordingly,
the annual rate of interest payable on your income tax shall be two percentage points higher than the underpayment rate established
under IRC 6621(a).
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Prepare the appropriate forms (i.e. Form 2210/2220 Sequa Worksheet and/or Form 2285) necessary to identify the availability
dates for interest computations.
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Attach the Form 2210/2220 Sequa Worksheet behind the Form 5403 Worksheet. Mark an "X"
in the appropriate tax year column on the Form 5403 Worksheet.
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If a Form 2285 is prepared, write the applicable code section in the appropriate tax year column of the Form 5403 Worksheet.
Attach the Form 2285 to the Form 5403 Worksheet and to the settlement computation.
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