1.41-6—Aggregation of expenditures.
(a) Controlled group of corporations; trades or businesses under common control—
(1) In general.
To determine the amount of research credit (if any) allowable to a trade or business that at the end of its taxable year is a member of a controlled group, a taxpayer must—
(i)
Compute the group credit in the manner described in paragraph (b) of this section; and
(ii)
Allocate the group credit among the members of the group in the manner described in paragraph (c) of this section.
(2) Consolidated groups.
For special rules relating to consolidated groups, see paragraph (d) of this section.
(3) Definitions.
For purposes of this section—
(i)
Consolidated group has the meaning set forth in § 1.1502-1(h).
(ii)
Controlled group and group mean a controlled group of corporations, as defined in section 41(f)(5), or a group of trades or businesses under common control. For rules for determining whether trades or businesses are under common control, see § 1.52-1 (b) through (g).
(iii)
Credit year means the taxable year for which the member is computing the credit.
(iv)
Group credit means the research credit (if any) allowable to a controlled group.
(v)
Trade or business means a sole proprietorship, a partnership, a trust, an estate, or a corporation that is carrying on a trade or business (within the meaning of section 162 ). Any corporation that is a member of a commonly controlled group shall be deemed to be carrying on a trade or business if any other member of that group is carrying on any trade or business.
(b) Computation of the group credit—
(1) In general.
All members of a controlled group are treated as a single taxpayer for purposes of computing the research credit. The group credit is computed by applying all of the section 41 computational rules on an aggregate basis. All members of a controlled group must use the same method of computation, either the method described in section 41(a) or the alternative incremental research credit (AIRC) method described in section 41(c)(4), in computing the group credit for a credit year.
(2) Start-up companies—
(i) In general.
For purposes of computing the group credit, a controlled group is treated as a start-up company for purposes of section 41(c)(3)(B)(i) if—
(A)
There was no taxable year beginning before January 1, 1984, in which a member of the group had gross receipts and either the same member or another member also had qualified research expenditures (QREs); or
(B)
There were fewer than three taxable years beginning after December 31, 1983, and before January 1, 1989, in which a member of the group had gross receipts and either the same member or another member also had QREs.
(ii) Example.
The following example illustrates the principles of paragraph (b)(2)(i) of this section:
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Example.
A, B, and C, all of which are calendar year taxpayers, are members of a controlled group. During the 1983 taxable year, A had QREs, but no gross receipts; B had gross receipts, but no QREs; and C had no QREs or gross receipts. The 1984 taxable year was the first taxable year for which each of A, B, and C had both QREs and gross receipts. A, B, and C had both QREs and gross receipts in 1985, 1986, 1987, and 1988. Because the first taxable year for which each of A, B, and C had both QREs and gross receipts began after December 31, 1983, each of A, B, and C is a start-up company under section 41(c)(3)(B)(i) and each is a start-up company for purposes of computing the stand-alone entity credit. During the 1983 taxable year, at least one member of the group, A, had QREs and at least one member of the group, B, had gross receipts, thus, the group had both QREs and gross receipts in 1983. Therefore, the controlled group is not a start-up company because the first taxable year for which the group had both QREs and gross receipts did not begin after December 31, 1983, and there were not fewer than three taxable years beginning after December 31, 1983, and before January 1, 1989, in which a member of the group had gross receipts and QREs.
(iii) First taxable year after December 31, 1993, for which the controlled group had QREs.
In the case of a controlled group that is treated as a start-up company under section 41(c)(3)(B)(i) and paragraph (b)(2)(i) of this section, for purposes of determining the group's fixed-base percentage under section 41(c)(3)(B)(ii), the first taxable year after December 31, 1993, for which the group has QREs is the first taxable year in which at least one member of the group has QREs.
(iv) Example.
The following example illustrates the principles of paragraph (b)(2)(iii) of this section:
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Example.
D, E, and F, all of which are calendar year taxpayers, are members of a controlled group. The group is treated as a start-up company under section 41(c)(3)(B)(i) and paragraph (b)(2)(i) of this section. The first taxable year after December 31, 1993, for which D had QREs was 1994. The first taxable year after December 31, 1993, for which E had QREs was 1995. The first taxable year after December 31, 1993, for which F had QREs was 1996. Because the 1994 taxable year was the first taxable year after December 31, 1993, for which at least one member of the group, D, had QREs, for purposes of determining the group's fixed-based percentage under section 41(c)(3)(B)(ii), the 1994 taxable year was the first taxable year after December 31, 1993, for which the group had QREs.
(c) Allocation of the group credit—
(1) In general.
To the extent the group credit (if any) computed under paragraph (b) of this section does not exceed the sum of the stand-alone entity credits of all of the members of a controlled group, computed under paragraph (c)(2) of this section, such group credit shall be allocated among the members of the controlled group in proportion to the stand-alone entity credits of the members of the controlled group, computed under paragraph (c)(2) of this section:
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(ii)
To the extent that the group credit (if any) computed under paragraph (b) of this section exceeds the sum of the stand-alone entity credits of all of the members of the controlled group, computed under paragraph (c)(2) of this section, such excess shall be allocated among the members of a controlled group in proportion to the QREs of the members of the controlled group:
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(2) Stand-alone entity credit.
The term stand-alone entity credit means the research credit (if any) that would be allowable to a member of a controlled group if the credit were computed as if section 41(f)(1) did not apply, except that the member must apply the rules provided in paragraphs (d)(1) (relating to consolidated groups) and (i) (relating to intra-group transactions) of this section. Each member's stand-alone entity credit for any credit year must be computed under whichever method (the method described in section 41(a) or the method described in section 41(c)(4)) results in the greater stand-alone entity credit for that member, without regard to the method used to compute the group credit.
(d) Special rules for consolidated groups—
(1) In general.
For purposes of applying paragraph (c) of this section, a consolidated group whose members are members of a controlled group is treated as a single member of the controlled group and a single stand-alone entity credit is computed for the consolidated group.
(2) Start-up company status.
A consolidated group's status as a start-up company and the first taxable year after December 31, 1993, for which a consolidated group has QREs are determined in accordance with the principles of paragraph (b)(2) of this section.
(3) Special rule for allocation of group credit among consolidated group members.
The portion of the group credit that is allocated to a consolidated group is allocated to the members of the consolidated group in accordance with the principles of paragraph (c) of this section. However, for this purpose, the stand-alone entity credit of a member of a consolidated group is computed without regard to section 41(f)(1), but with regard to paragraph (i) of this section.
(e) Examples.
The following examples illustrate the provisions of this section. Unless otherwise stated, no members of a controlled group are members of a consolidated group, no member of the group made any basic research payments or paid or incurred any amounts to an energy research consortium, and the group has not made an AIRC election (except as provided in Example 6) or an ASC election. For an example illustrating the calculation of the alternative simplified credit under section 41(c)(5), which is applicable for taxable years ending after December 31, 2006, see § 1.41-6T(e).
Code of Federal Regulations
Example 1.
Group credit is less than sum of members' stand-alone entity credits—(i) Facts. A, B, and C, all of which are calendar-year taxpayers, are members of a controlled group. For purposes of computing the group credit for the 2004 taxable year (the credit year), A, B, and C had the following:
| Credit Year QREs |
$200x |
$20x |
$110x |
$330x |
| 1984-1988 QREs |
$40x |
$10x |
$100x |
$150x |
| 1984-1988 Gross Receipts |
$1,000x |
$350x |
$150x |
$1,500x |
| Average Annual Gross Receipts for 4 Years Preceding the Credit Year |
$1,200x |
$200x |
$300x |
$1,700x |
(ii) Computation of the group credit—(A) In general. The research credit allowable to the group is computed as if A, B, and C were one taxpayer. The group credit is equal to 20 percent of the excess of the group's aggregate credit year QREs ($330x) over the group's base amount ($170x). The group credit is 0.20 × ($330x−$170x), which equals $32x.
(B) Group's base amount—(1) Computation. The group's base amount equals the greater of: The group's fixed-base percentage (10 percent) multiplied by the group's aggregate average annual gross receipts for the 4 taxable years preceding the credit year ($1,700x), or the group's minimum base amount ($165x). The group's base amount, therefore, is $170x, which is the greater of: 0.10 × $1,700x, which equals $170x, or $165x.
(2) Group's minimum base amount. The group's minimum base amount is 50 percent of the group's aggregate credit year QREs. The group's minimum base amount is 0.50 × $330x, which equals $165x.
(3) Group's fixed-base percentage. The group's fixed-base percentage is the lesser of: The ratio that the group's aggregate QREs for the taxable years beginning after December 31, 1983, and before January 1, 1989, bear to the group's aggregate gross receipts for the same period, or 16 percent (the statutory maximum). The group's fixed-base percentage, therefore, is 10 percent, which is the lesser of: $150x/$1,500x, which equals 10 percent, or 16 percent.
(iii) Allocation of the group credit. Under paragraph (c)(2) of this section, each member's stand-alone entity credit must be computed using the method that results in the greater stand-alone entity credit for that member. The stand-alone entity credit for each of A, B, and C is greater using the method described in section 41(a). Therefore, the stand-alone entity credit for each of A, B, and C must be computed using the method described in section 41(a). A's stand-alone entity credit is $20x. B's stand-alone entity credit is $2x. C's stand-alone entity credit is $11x. The sum of the members' stand-alone entity credits is $33x. Because the group credit of $32x is less than the sum of the stand-alone entity credits of all the members of the group ($33x), the group credit is allocated among the members of the group based on the ratio that each member's stand-alone entity credit bears to the sum of the stand-alone entity credits of all the members of the group. The $32x group credit is allocated as follows:
| Stand-Alone Entity Credit |
$20x |
$2x |
$11x |
$33x |
| Allocation Ratio (Stand-Alone Entity Credit/Sum of Stand-Alone Entity Credits) |
20/33 |
2/33 |
11/33 |
|
| Multiplied by: Group Credit |
$32x |
$32x |
$32x |
|
| Equals: Credit Allocated to Member |
$19.39x |
$1.94x |
$10.67x |
$32x |
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Example 2.
Group credit exceeds sum of members' stand-alone entity credits—(i) Facts. D, E, F, and G, all of which are calendar-year taxpayers, are members of a controlled group. For purposes of computing the group credit for the 2004 taxable year (the credit year), D, E, F, and G had the following:
| Credit Year QREs |
$580x |
$10x |
$70x |
$15x |
$675x |
| 1984-1988 QREs |
$500x |
$25x |
$100x |
$25x |
$650x |
| 1984-1988 Gross Receipts |
$4,000x |
$5,000x |
$2,000x |
$10,000x |
$21,000x |
| Average Annual Gross Receipts for 4 Years Preceding the Credit Year |
$5,000x |
$5,000x |
$2,000x |
$5,000x |
$17,000x |
(ii) Computation of the group credit—(A) In general. The research credit allowable to the group is computed as if D, E, F, and G were one taxpayer. The group credit is equal to 20 percent of the excess of the group's aggregate credit year QREs ($675x) over the group's base amount ($527x). The group credit is 0.20 × ($675x−$527x), which equals $29.76x.
(B) Group's base amount—(1) Computation. The group's base amount equals the greater of: The group's fixed-base percentage (3.10 percent) multiplied by the group's aggregate average annual gross receipts for the 4 taxable years preceding the credit year ($17,000x), or the group's minimum base amount ($337.50x). The group's base amount, therefore, is $527x, which is the greater of: 0.031 × $17,000x, which equals $527x, or $337.50x.
(2) Group's minimum base amount. The group's minimum base amount is 50 percent of the group's aggregate credit year QREs. The group's minimum base amount is 0.50 × $675x, which equals $337.50x.
(3) Group's fixed-base percentage. The group's fixed-base percentage is the lesser of: The ratio that the group's aggregate QREs for the taxable years beginning after December 31, 1983, and before January 1, 1989, bear to the group's aggregate gross receipts for the same period, or 16 percent (the statutory maximum). The group's fixed-base percentage, therefore, is 3.10 percent, which is the lesser of: $650x/$21,000x, which equals 3.10 percent, or 16 percent.
(iii) Allocation of the group credit. Under paragraph (c)(2) of this section, each member's stand-alone entity credit must be computed using the method that results in the greater stand-alone entity credit for that member. The stand-alone entity credits for D ($19.46x) and F ($1.71x) are greater using the AIRC method. Therefore, the stand-alone entity credits for D and F must be computed using the AIRC method. The stand-alone entity credit for G ($0.50x) is greater using the method described in section 41(a). Therefore, the stand-alone entity credit for G must be computed using the method described in section 41(a). E's stand-alone entity credit computed under either method is zero. The sum of the members' stand-alone entity credits is $21.67x. Because the group credit of $29.76x is greater than the sum of the stand-alone entity credits of all the members of the group ($21.67x), each member of the group is allocated an amount of the group credit equal to that member's stand-alone entity credit. The excess of the group credit over the sum of the members' stand alone entity credits ($8.09x) is allocated among the members of the group based on the ratio that each member's QREs bear to the sum of the QREs of all the members of the group. The $29.76x group credit is allocated as follows:
| Group Credit |
|
|
|
|
$29.76x |
| Minus: Sum of Stand-Alone Entity Credits |
$19.46x |
$0.00x |
$1.71x |
$0.50x |
$21.67x |
| Equals: Excess Group Credit |
|
|
|
|
$8.09x |
|
|
|
|
|
|
| Excess Group Credit |
$8.09x |
$8.09x |
$8.09x |
$8.09x |
|
| Multiplied By Allocation Ratio: QREs/Sum of QREs |
580/675 |
10/675 |
70/675 |
15/675 |
|
| Excess Group Credit Allocated |
$6.95x |
$0.12x |
$0.84x |
$0.18x |
|
| Plus: Stand-Alone Entity Credit |
$19.46x |
$0.00x |
$1.71x |
$0.50x |
|
| Equals: Credit Allocated to Member |
$26.41x |
$0.12x |
$2.55x |
$0.68x |
$29.76x |
Code of Federal Regulations
Example 3.
Consolidated group within a controlled group—(i) Facts. The facts are the same as in Example 2, except that D and E file a consolidated return.
(ii) Allocation of the group credit—(A) In general. For purposes of allocating the controlled group's research credit of $29.76x among the members of the controlled group, D and E are treated as a single member of the controlled group.
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(B) Computation of stand-alone entity credits. The stand-alone entity credit for the consolidated group is computed by treating D and E as a single entity. Under paragraph (c)(2) of this section, the stand-alone entity credit for each member must be computed using the method that results in the greater stand-alone entity credit for that member. The stand-alone entity credit for each of the DE consolidated group ($17.55x) and F ($1.71x) is greater using the AIRC method. Therefore, the stand-alone entity credit for each of the DE consolidated group and F must be computed using the AIRC method. The stand-alone entity credit for G ($0.50x) is greater using the method described in section 41(a). Therefore, the stand-alone entity credit for G must be computed using the method described in section 41(a). The sum of the members' stand-alone entity credits is $19.76x.
(C) Allocation of controlled group credit. Because the group credit of $29.76x is greater than the sum of the stand-alone entity credits of all the members of the group ($19.76x), each member of the group is allocated an amount of the group credit equal to that member's stand-alone entity credit. The excess of the group credit over the sum of the members' stand-alone entity credits ($10.00x) is allocated among the members of the group based on the ratio that each member's QREs bear to the sum of the QREs of all the members of the group. The group credit of $29.76x is allocated as follows:
| Group Credit |
|
|
|
$29.76x |
| Minus: Sum of Stand-Alone Entity Credits |
$17.55x |
$1.71x |
$0.50x |
$19.76x |
| Equals: Excess Group Credit |
|
|
|
$10.00x |
|
|
|
|
|
| Excess Group Credit |
$10.00x |
$10.00x |
$10.00x |
|
| Multiplied By Allocation Ratio: QREs/Sum of QREs |
590/675 |
70/675 |
15/675 |
|
| Excess Group Credit Allocated |
$8.74x |
$1.04x |
$0.22x |
|
| Plus: Stand-Alone Entity Credit |
$17.55x |
$1.71x |
$0.50x |
|
| Equals: Credit Allocated to Member |
$26.29x |
$2.75x |
$0.72x |
$29.76x |
(iii) Allocation of the group credit allocated to consolidated group—(A) In general. The group credit that is allocated to a consolidated group is allocated among the members of the consolidated group in accordance with the principles of paragraph (c) of this section.
(B) Computation of stand-alone entity credits. Under paragraph (c)(2) of this section, the stand-alone entity credit for each member of the consolidated group must be computed using the method that results in the greater stand-alone entity credit for that member. The stand-alone entity credit for D ($19.46x) is greater using the AIRC method. Therefore, the stand-alone entity credit for D must be computed using the AIRC method. The stand-alone entity credit for E is zero under either method. The sum of the stand-alone entity credits of the members of the consolidated group is $19.46x.
(C) Allocation among members of consolidated group. Because the amount of the group credit allocated to the consolidated group ($26.29x) is greater than $19.46x, the sum of the stand-alone entity credits of all the members of the consolidated group, each member of the consolidated group is allocated an amount of the group credit allocated to the consolidated group equal to that member's stand-alone entity credit The excess of the group credit allocated to the consolidated group over the sum of the consolidated group members' stand alone entity credits ($6.83x) is allocated among the members of the consolidated group based on the ratio that each member's QREs bear to the sum of the QREs of all the members of the consolidated group. The group credit of $26.29x allocated to the DE consolidated group is allocated between D and E as follows:
| Group Credit |
|
|
$26.29x |
| Minus: Sum of Stand-Alone Entity Credits |
$19.46x |
$0.00x |
$19.46x |
| Excess Group Credit |
|
|
$6.83x |
|
|
|
|
| Excess Group Credit |
$6.83x |
$6.83x |
|
| Multiplied By Allocation Ratio: QREs/Sum of QREs |
580/590 |
10/590 |
|
| Excess Group Credit Allocated |
$6.71x |
$0.12x |
|
| Plus: Stand-Alone Entity Credit |
$19.46x |
$0.00x |
|
| Equals: Credit Allocated to Member |
$26.17x |
$0.12x |
$26.29x |
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Example 4.
Member is a start-up company—(i) Facts. H, I, and J, all of which are calendar-year taxpayers, are members of a controlled group. The first taxable year for which J has both QREs and gross receipts begins after December 31, 1983, therefore, J is a start-up company under section 41(c)(3)(B)(i). The first taxable year for which H and I had both QREs and gross receipts began before December 31, 1983, therefore, H and I are not start-up companies under section 41(c)(3)(B)(i). For purposes of computing the group credit for the 2004 taxable year (the credit year), H, I, and J had the following:
| Credit Year QREs |
$200x |
$20x |
$50x |
$270x |
| 1984-1988 QREs |
$55x |
$15x |
$0x |
$70x |
| 1984-1988 Gross Receipts |
$1,000x |
$400x |
$0x |
$1,400x |
| Average Annual Gross Receipts for 4 Years Preceding the Credit Year |
$1,200x |
$200x |
$0x |
$1,400x |
(ii) Computation of the group credit—(A) In general. The research credit allowable to the group is computed as if H, I, and J were one taxpayer. The group credit is equal to 20 percent of the excess of the group's aggregate credit year QREs ($270x) over the group's base amount ($135x). The group credit is 0.20 × ($270x−$135x), which equals $27x.
(B) Group's base amount—(1) Computation. The group's base amount equals the greater of: the group's fixed-base percentage (5 percent) multiplied by the group's aggregate average annual gross receipts for the 4 taxable years preceding the credit year ($1,400x), or the group's minimum base amount ($135x). The group's base amount, therefore, is $135x, which is the greater of: 0.05 × $1,400x, which equals $70x, or $135x.
(2) Group's minimum base amount. The group's minimum base amount is 50 percent of the group's aggregate credit year QREs. The group's minimum base amount is 0.50 × $270x, which equals $135x.
(3) Group's fixed-base percentage. Because the first taxable year in which at least one member of the group has QREs and at least one member of the group has gross receipts does not begin after December 31, 1983, the group is not a start-up company. Therefore, the group's fixed-base percentage is the lesser of: the ratio that the group's aggregate QREs for the taxable years beginning after December 31, 1983, and before January 1, 1989, bear to the group's aggregate gross receipts for the same period, or 16 percent (the statutory maximum). The group's fixed-base percentage, therefore, is 5 percent, which is the lesser of: $70x/$1,400x, which equals 5 percent, or 16 percent.
(iii) Allocation of the group credit. Under paragraph (c)(2) of this section, the stand-alone entity credit for each member of the group must be computed using the method that results in the greater stand-alone entity credit for that member. The stand-alone entity credits for H ($20x), I ($2x), and J ($5x) are greater using the method described in section 41(a). Therefore, the stand-alone entity credits for each of H, I, and J must be computed using the method described in section 41(a). The sum of the stand-alone entity credits of the members of the group is $27x. Because the group credit of $27x is equal to the sum of the stand-alone entity credits of all the members of the group ($27x), the group credit is allocated among the members of the group based on the ratio that each member's stand-alone entity credit bears to the sum of the stand-alone entity credits of all the members of the group. The group credit of $27x is allocated as follows:
| Stand-Alone Entity Credit |
$20x |
$2x |
$5x |
$27x |
| Allocation Ratio (Stand-Alone Entity Credit/Sum of Stand-Alone Entity Credits) |
20/27 |
2/27 |
5/27 |
|
| Multiplied by: Group Credit |
$27x |
$27x |
$27x |
|
| Equals: Credit Allocated to Member |
$20x |
$2x |
$5x |
$27x |
Code of Federal Regulations
Example 5.
Group is a start-up company—(i) Facts. K, L, and M, all of which are calendar-year taxpayers, are members of a controlled group. The taxable year ending on December 31, 1999, is the first taxable year in which a member of the group had QREs and either the same member or another member also had gross receipts. In that year, each of K, L, and M had both QREs and gross receipts. The 2004 taxable year is the fifth taxable year beginning after December 31, 1993, for which at least one member of the group had QREs For purposes of computing the group credit for the 2004 taxable year (the credit year), K, L, and M had the following:
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| Credit Year QREs |
$255x |
$25x |
$100x |
$380x |
| 1984-1988 QREs |
$0x |
$0x |
$0x |
$0x |
| 1984-1988 Gross Receipts |
$0x |
$0x |
$0x |
$0x |
| Average Annual Gross Receipts for 4 Years Preceding the Credit Year |
$1,600x |
$340x |
$300x |
$2,240x |
(ii) Computation of the group credit—(A) In general. The research credit allowable to the group is computed as if K, L, and M were one taxpayer. The group credit is equal to 20 percent of the excess of the group's aggregate credit year QREs ($380x) over the group's base amount ($190x). The group credit is 0.20x ($380x − $190x), which equals $38x.
(B) Group's base amount—(1) Computation. The group's base amount equals the greater of: the group's fixed-base percentage (3 percent) multiplied by the group's aggregate average annual gross receipts for the 4 taxable years preceding the credit year ($2,240x), or the group's minimum base amount ($190x). The group's base amount, therefore, is $190x, which is the greater of: 0.03 × $2,240x, which equals $67.20x, or $190x.
(2) Group's minimum base amount. The group's minimum base amount is 50 percent of the group's aggregate credit year QREs. The group's minimum base amount is 0.50 × $380x, which equals $190x.
(3) Group's fixed-base percentage. Because the first taxable year in which at least one member of the group has QREs and at least one member of the group has gross receipts begins after December 31, 1983, the group is treated as a start-up company under section 41(c)(3)(B)(i) and paragraph (b)(2)(i) of this section. Because the 2004 taxable year is the fifth taxable year beginning after December 31, 1993, for which at least one member of the group had QREs, under section 41(c)(3)(B)(ii)(I), the group's fixed-base percentage is 3 percent.
(iii) Allocation of the group credit. Under paragraph (c)(2) of this section, the stand-alone entity credit for each member of the group must be computed using the method that results in the greater stand-alone entity credit for that member. The stand-alone entity credit for each of K ($25.5x), L ($2.5x), and M ($10x) is greater using the method described in section 41(a). Therefore the stand-alone entity credits for each of K, L, and M must be computed using the method described in section 41(a). The sum of the stand-alone entity credits of all the members of the group is $38x. Because the group credit of $38x is equal to sum of the stand-alone entity credits of all the members of the group ($38x), the group credit is allocated among the members of the group based on the ratio that each member's stand-alone entity credit bears to the sum of the stand-alone entity credits of all the members of the group. The $38x group credit is allocated as follows:
| Stand-Alone Entity Credit |
$25.5x |
$2.5x |
$10x |
$38x |
| Allocation Ratio (Stand-Alone Entity Credit/Sum of Stand-Alone Entity Credits) |
25.5/38 |
2.5/38 |
10/38 |
|
| Multiplied by: Group Credit |
$38x |
$38x |
$38x |
|
| Equals: Credit Allocated to Member |
$25.5x |
$2.5x |
$10x |
$38x |
Code of Federal Regulations
Example 6.
Group alternative incremental research credit—(i) Facts. N, O, and P, all of which are calendar-year taxpayers, are members of a controlled group. The research credit under section 41(a) is not allowable to the group for the 2004 taxable year because the group's aggregate QREs for the 2004 taxable year are less than the group's base amount. The group credit is computed using the AIRC rules of section 41(c)(4). For purposes of computing the group credit for the 2004 taxable year (the credit year), N, O, and P had the following:
| Credit Year QREs |
$0x |
$20x |
$110x |
$130x |
| Average Annual Gross Receipts for 4 Years Preceding the Credit Year |
$1,200x |
$200x |
$300x |
$1,700x |
(ii) Computation of the group credit. The research credit allowable to the group is computed as if N, O, and P were one taxpayer. The group credit is equal to the sum of: 2.65 percent of so much of the group's aggregate QREs for the taxable year as exceeds 1 percent of the group's aggregate average annual gross receipts for the 4 taxable years preceding the credit year, but does not exceed 1.5 percent of such average; 3.2 percent of so much of the group's aggregate QREs as exceeds 1.5 percent of such average but does not exceed 2 percent of such average; and 3.75 percent of so much of such QREs as exceeds 2 percent of such average. The group credit is [0.0265 × [($1,700x × 0.015) − ($1,700x × 0.01)]] [0.032 × [($1,700x × 0.02) − ($1,700x × 0.015)]] [0.0375 × [$130x − ($1,700x × 0.02)]], which equals $4.10x.
Code of Federal Regulations
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(iii) Allocation of the group credit. Under paragraph (c)(2) of this section, the stand-alone entity credit for each member of the group must be computed using the method that results in the greater stand-alone entity credit for that member. The stand-alone entity credit for N is zero under either method. The stand-alone entity credit for each of O ($0.66x) and P ($3.99x) is greater using the AIRC method. Therefore, the stand-alone entity credits for each of O and P must be computed using the AIRC method. The sum of the stand-alone entity credits of the members of the group is $4.65x. Because the group credit of $4.10x is less than the sum of the stand-alone entity credits of all the members of the group ($4.65x), the group credit is allocated among the members of the group based on the ratio that each member's stand-alone entity credit bears to the sum of the stand-alone entity credits of all the members of the group. The $4.10x group credit is allocated as follows:
| Stand-Alone Entity Credit |
$0.00x |
$0.66x |
$3.99x |
$4.65x |
| Allocation Ratio (Stand-Alone Entity Credit/Sum of Stand-Alone Entity Credits) |
0/4.65 |
0.66/4.65 |
3.99/4.65 |
|
| Multiplied by: Group Credit |
$4.10x |
$4.10x |
$4.10x |
|
| Equals: Credit Allocated to Member |
$0.00x |
$0.58x |
$3.52x |
$4.10x |
(f) For taxable years beginning before January 1, 1990.
For taxable years beginning before January 1, 1990, see § 1.41-6 as contained in 26 CFR part 1, revised April 1, 2005.
(g) Tax accounting periods used—
(1) In general.
The credit allowable to a me