Controlled Group R&D Credit
When multiple related companies operate under common ownership, the IRS requires them to aggregate their Qualified Research Expenses (QREs) to determine a single R&D Tax Credit for the entire group.
Under IRC §41(f), controlled groups and trades or businesses under common control are treated as one taxpayer for R&D credit purposes.
Understanding this rule ensures compliance, avoids duplication, and correctly allocates credits among entities.
Relevant Tax Codes and Forms
- IRC §41(f): Defines aggregation rules for controlled groups and common control entities.
- Treas. Reg. §1.41-6: Provides detailed guidance on QRE aggregation and credit allocation.
- Form 6765, Part IV: Used for controlled group reporting and member identification.
Step 1: Understanding Controlled Groups
A controlled group includes any group of corporations or entities that are related through ownership or control.
Per IRC §1563(a), common types of controlled groups include:
- Parent-Subsidiary Groups:
One corporation owns ≥80% of another. - Brother-Sister Groups:
Five or fewer individuals own ≥80% of two or more corporations with effective control. - Combined Groups:
A mix of parent-subsidiary and brother-sister relationships.
Step 2: Aggregating QREs and Gross Receipts
Under IRC §41(f)(1), all members of a controlled group must aggregate their:
- Qualified Research Expenses (QREs)
- Gross Receipts
- Base Amount Calculations
Once aggregated, the group credit is computed as if it were one taxpayer.
After that, each entity receives an allocation of the total credit based on its contribution to the group’s total QREs.
Example: Aggregating QREs in a Controlled Group
Scenario:
ParentCo owns 100% of SubCo1 and SubCo2.
Each performs separate qualified research in 2025.
| Entity | QREs ($) | Gross Receipts ($) |
|---|---|---|
| ParentCo | 400,000 | 2,000,000 |
| SubCo1 | 300,000 | 1,000,000 |
| SubCo2 | 500,000 | 2,500,000 |
| Total (Group) | 1,200,000 | 5,500,000 |
Step 1: Compute Group Credit
Assume fixed-base percentage = 6%.
Base Amount = 6% × 5,500,000 = 330,000
R&D Credit = (1,200,000 – 330,000) × 20% = $174,000
Step 2: Allocate Credit Among Members
Credit is divided based on each entity’s share of total QREs.
| Entity | % of Group QREs | Allocated Credit ($) |
|---|---|---|
| ParentCo | 33.3% | 58,000 |
| SubCo1 | 25.0% | 43,500 |
| SubCo2 | 41.7% | 72,500 |
Total Group Credit = $174,000 (allocated proportionally)
Step 3: Reporting Requirements
- Each member must file Form 6765 with its return.
- The common parent or designated member identifies all related entities and aggregated totals.
- The group should maintain a consolidated R&D credit worksheet showing each entity’s:
- QREs
- Gross Receipts
- Base Amount
- Allocated Credit
- Maintain intercompany agreements defining which entity retains R&D ownership.
Step 4: Key Compliance Rules
- Single Base Amount Rule: The group uses one combined fixed-base percentage.
- U.S. Research Requirement: Only domestic research qualifies; foreign affiliates are excluded.
- Documentation Consistency: Internal reporting must match each entity’s tax filing.
- Allocation Flexibility: Allocation may follow economic substance or proportional cost sharing.
Step 5: Common Pitfalls
- Failing to aggregate all entities’ QREs before credit calculation.
- Claiming the same expense in multiple entities.
- Excluding subsidiaries that share ownership through a holding company.
- Omitting foreign receipts from gross total before calculating FBP.
- Forgetting to attach Form 6765, Part IV listing all controlled group members.
Conclusion
Properly aggregating Qualified Research Expenses (QREs) for Controlled Groups ensures compliance with IRC §41(f) and prevents disallowed credits.
Whether your structure includes subsidiaries, partnerships, or related LLCs, aggregating expenses before allocation guarantees accurate R&D credit reporting for 2025.
Call to Action
For expert assistance with Controlled Group R&D Credit calculations, contact Anshul Goyal, CPA EA FCA, a U.S.-licensed Certified Public Accountant, Enrolled Agent authorized to practice before the IRS, and a cross-border tax expert helping American and Indian businesses maintain R&D compliance.
Disclaimer
This article is for educational purposes only and does not constitute legal or tax advice. Always consult a licensed CPA before preparing or filing R&D credit claims.
Top 5 FAQs
- What is a controlled group for R&D purposes?
A group of corporations or businesses with ≥80% common ownership or control. - How are R&D credits calculated for controlled groups?
All QREs and receipts are aggregated, and the credit is allocated among members based on contribution. - Can partnerships or LLCs be part of a controlled group?
Yes, if ownership thresholds under IRC §41(f) and §1563(a) are met. - Do foreign subsidiaries’ expenses qualify?
No, only U.S.-based research qualifies for the credit. - What form is used for controlled group reporting?
Form 6765, Part IV, must list all related entities and allocation details.
About Our CPA
Anshul Goyal, CPA EA FCA is a Certified Public Accountant licensed in the U.S., Enrolled Agent admitted to practice before the IRS, and a cross-border tax expert representing American and Indian businesses in R&D credit analysis, audits, and IRS compliance.