Introduction
The ASC Method under IRC §41(c)(5) provides a simplified way for businesses to calculate the R&D Tax Credit without relying on historical data from the 1980s. It’s ideal for startups and modern companies that may not have consistent base-year records. The ASC approach streamlines the credit calculation by focusing only on recent Qualified Research Expenses (QREs).
Relevant Tax Codes and Forms
- IRC §41(c)(5): Defines the Alternative Simplified Credit computation.
- Form 6765 (Part III): Used to calculate and claim the ASC credit.
- Form 1120, 1065, or 1040: The main income tax return where the credit is claimed.
Step 1: Determine Qualified Research Expenses (QREs)
Under IRC §41(b), QREs include:
- Wages: Direct research wages of technical staff and supervisors.
- Supplies: Tangible materials used for experimentation.
- Contract Research: 65% of payments made to outside contractors.
- Cloud/Server Costs: Computer rental expenses tied to testing and simulation.
Step 2: Calculate Average QREs for the Past Three Years
Add the total QREs for the previous three tax years and divide by three.
If you don’t have three years of data (new business), use only the available years.
Example:
- 2022 QREs = $300,000
- 2023 QREs = $500,000
- 2024 QREs = $400,000
Average QREs = ($300,000 + $500,000 + $400,000) ÷ 3 = $400,000
Step 3: Apply the ASC Formula
The ASC credit rate is 14% of the excess of current-year QREs over 50% of the average of the prior three years.
Formula:
ASC Credit = (Current-Year QREs – 50% × Average of Prior 3 Years) × 14%
Example:
- 2025 QREs = $700,000
- 50% of Avg. 3-Year QREs = $200,000
- ASC Credit = ($700,000 – $200,000) × 14% = $70,000
✅ Final ASC Credit = $70,000
Step 4: File and Report the Credit
- Complete Form 6765, Part III (ASC Method section).
- Attach to Form 1120, 1065, or 1040.
- Maintain research documentation — payroll, invoices, experiment records.
- If offsetting payroll taxes, use Form 8974.
- Keep records for at least 4 years for IRS verification.
Step 5: Key Benefits of the ASC Method
- Simpler: No need for base-year data.
- Consistent: Based on recent QREs, easier to track annually.
- Flexible: Can be elected each year when filing Form 6765.
- IRS Approved: Supported under IRC §41(c)(5) and Treasury Reg. §1.41-9.
Conclusion
The ASC Method offers a modern and straightforward approach to claiming the R&D Tax Credit. Businesses with incomplete historical data or startups newly engaging in R&D find this method practical and compliant. It’s especially beneficial for companies looking to simplify credit computation while ensuring IRS accuracy.
Call to Action
If your company performs R&D and wants to explore credit options, consult Anshul Goyal, CPA EA FCA, a U.S.-licensed Certified Public Accountant, Enrolled Agent admitted to practice before the IRS, and cross-border tax expert assisting American and Indian businesses with IRS compliance and credit claims.
Disclaimer
This blog is for informational purposes only and should not be treated as tax or legal advice. Consult a qualified CPA before making any tax decisions.
Top 5 FAQs
1. What is the ASC Method?
It’s an IRS-approved simplified way to calculate the R&D credit using the last three years’ QREs.
2. What percentage applies to ASC?
14% of the amount exceeding 50% of the average of prior three years’ QREs.
3. Who should use ASC?
Startups or companies without reliable 1980s base-year data.
4.Can I switch from Regular to ASC Method?
Yes, you can elect ASC each year, but once filed, it applies for that tax year.
5. Is ASC better for small businesses?
Yes. It’s simpler, requires less documentation, and suits new or growing businesses.
About Our CPA
Anshul Goyal, CPA EA FCA is a Certified Public Accountant licensed in the United States, an Enrolled Agent authorized to practice before the IRS, and a cross-border tax expert representing clients in tax audits, credits, and international compliance.