ASC vs Regular Method
The R&D Tax Credit under IRC §41 can be calculated using two different methods — the Regular Method and the Alternative Simplified Credit (ASC) Method.
Each approach has its own formula, data requirements, and benefits.
Choosing the right method can mean the difference between an optimized credit and a missed opportunity.
This guide explains how to evaluate both methods and select the one that best fits your business for the 2025 tax year.
Relevant Tax Codes and Forms
- IRC §41(a): Establishes the credit for increasing research activities.
- IRC §41(c): Defines the Regular Method.
- IRC §41(c)(5): Defines the Alternative Simplified Credit (ASC) Method.
- Form 6765: Used to claim the R&D credit under either method.
Step 1: Understand the Regular Method
The Regular Method calculates your R&D credit by comparing current-year Qualified Research Expenses (QREs) with a historical base amount derived from your Fixed-Base Percentage (FBP) and Average Gross Receipts from the four preceding years.
Formula:
R&D Credit = (Current-Year QREs – Base Amount) × 20%
Example:
- QREs (2025): $800,000
- Fixed-Base %: 6%
- Average Gross Receipts (2021–2024): $5,000,000
- Base = 6% × $5,000,000 = $300,000
- Credit = ($800,000 – $300,000) × 20% = $100,000
R&D Credit (Regular Method): $100,000
Advantages:
- Higher credit rate (20%).
- Rewards consistent research growth.
Disadvantages:
- Requires 1984–1988 base-year data.
- Complex for startups or entities with reorganizations.
Step 2: Understand the ASC Method
The Alternative Simplified Credit (ASC) simplifies the process by using only the last three years of QREs instead of 1980s base-year data.
Formula:
R&D Credit = (Current-Year QREs – 50% × Avg. of Prior 3 Years’ QREs) × 14%
Example:
- Current-Year QREs: $800,000
- Prior 3 Years’ QREs: $400,000, $450,000, $500,000
- Average = $450,000
- 50% of Avg. = $225,000
- Credit = ($800,000 – $225,000) × 14% = $80,500
R&D Credit (ASC Method): $80,500
Advantages:
- No need for 1980s data.
- Simple, consistent, and suitable for startups.
Disadvantages:
- Lower credit rate (14%).
- May yield smaller credits if QREs fluctuate heavily.
Step 3: Compare the Two Methods
| Criteria | Regular Method | ASC Method |
|---|---|---|
| IRC Reference | §41(c)(1–4) | §41(c)(5) |
| Credit Rate | 20% | 14% |
| Data Required | 1984–1988 QREs | 3 prior years QREs |
| Ease of Use | Complex | Simple |
| Best For | Established firms | Startups, new entities |
| Election | Default | Optional (Form 6765) |
Step 4: How to Choose the Right Method
Use the Regular Method if:
- You have accurate historical R&D data.
- Your fixed-base percentage is low (under 5%).
- You have strong year-over-year R&D growth.
Use the ASC Method if:
- You’re a startup or young company.
- You lack historical 1980s data.
- You want a simplified, consistent computation.
Tip:
You can evaluate both methods each year and choose the one that provides the greater benefit. However, once you elect the ASC method, it applies only for that specific tax year and is irrevocable after filing.
Step 5: Filing and Election Process
- Complete Form 6765.
- Use Part I for Regular Method.
- Use Part III for ASC Method.
- Attach the form to your Form 1120, 1065, or 1040.
- Retain all supporting records, payroll data, and expense documentation.
- Keep records for at least four years for potential IRS examination.
Conclusion
The choice between ASC vs Regular Method depends on your company’s history, R&D patterns, and available data.
While the Regular Method often yields a higher percentage, the ASC Method offers simplicity and accessibility — especially for startups and growing tech firms in 2025.
Review both calculations annually to ensure you’re optimizing your R&D tax benefit under IRC §41.
Call to Action
For professional assistance in evaluating ASC vs Regular Method and ensuring accurate R&D credit claims, consult 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 assisting American and Indian businesses with R&D and IRS compliance.
Disclaimer
This article is for informational purposes only and not intended as legal or tax advice. Consult a CPA for personalized tax planning before making R&D credit elections.
Top 5 FAQs
- Can I switch between Regular and ASC Methods?
Yes, you can choose either method each year, but the ASC election is irrevocable once filed. - Which method gives a higher credit?
The Regular Method often provides a higher rate but requires extensive historical data. - Who should use the ASC Method?
Startups, small businesses, or companies without base-year data. - What form do I use to claim the R&D credit?
Use Form 6765, Credit for Increasing Research Activities. - Do both methods follow IRC §41?
Yes, both methods are governed by IRC §41(c) and must meet the same eligibility tests.
About Our CPA
Anshul Goyal, CPA EA FCA is a Certified Public Accountant licensed in the United States, Enrolled Agent admitted to practice before the IRS, and a cross-border tax specialist representing American and Indian businesses in R&D credits, compliance, and IRS examinations.