New IRS regulations issued on June 2 expand the ability of companies to claim the research credit retroactively for prior tax years on amended tax returns. This makes it far more likely that the credit will subsidize activities that businesses would have carried out anyway, even in the absence of any tax incentive.
The research credit is supposedly designed to encourage companies to expand the amount of research they conduct. That means it can be thought of as effective only to the extent that it subsidizes research that businesses would not have carried out anyway even if no tax break was offered to them. Of course, if a company carried out research and did not even become aware that it could claim the credit until three years later, there is no way that research was the result of the credit.
In our December 2013 report, “Reform the Research Tax Credit — Or Let It Die,” Citizens for Tax Justice called upon Congress to bar companies from claiming the credit on amended returns. There are two main versions of the research credit available, the regular research credit and the “alternative simplified credit” (ASC). Companies were already allowed to claim the regular credit on amended returns — which CTJ sought to ban. But IRS regulations had barred companies from claiming the ASC on amended returns — until now.
As the CTJ report explained, at least two senators explicitly called for allowing companies to claim the ACS on amended returns, giving absolutely no policy rationale for such a change. It appears likely that the pressure to make this change came from accounting firms like Alliantgroup who approach businesses and offer to help them claim the research credit for activities they carried out in the past.