# Computing the credit: the ASC and the regular method

> The alternative simplified credit line by line, the 6% rule for a company's first years, and when the regular credit is the better method.

Source: https://lopifi.com/learn/how-to-calculate-the-rd-credit
Part of: Lopifi — US GAAP books on autopilot, checked by a CPA (https://lopifi.com)

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**How do you calculate the R&D tax credit? ASC versus the regular credit** The alternative simplified credit line by line, the 6% rule for a company's first years, and when the regular credit is the better method.

There are two ways to compute the credit, and Form 6765 has a section for each: the [regular credit](https://lopifi.com/md/glossary/regular-research-credit) and the [alternative simplified credit](https://lopifi.com/md/glossary/alternative-simplified-credit). The instructions suggest figuring both and claiming the larger. The ASC comes first here because its arithmetic needs only QREs.

The ASC is 14% of the year's QREs above half the average of the three prior years. If any one of those three years had no QREs at all, it's 6% of the year's QREs instead.

> “At the election of the taxpayer, the credit determined under subsection (a)(1) shall be equal to 14 percent of so much of the qualified research expenses for the taxable year as exceeds 50 percent of the average qualified research expenses for the 3 taxable years preceding the taxable year for which the credit is being determined.”

— [IRC §41(c)(4)(A)](https://www.law.cornell.edu/uscode/text/26/41), The alternative simplified credit

The form does the halving in one step. Line 21 is the three prior years' QREs added up, line 22 divides that by six, which is half of the average, and line 24 applies the rate.

> “Multiply line 23 by 14% (0.14). If you skipped lines 22 and 23, multiply line 20 by 6% (0.06)”

— [Form 6765 (Rev. December 2024), Section B, line 24](https://www.irs.gov/pub/irs-pdf/f6765.pdf) (PDF), Form 6765, Credit for Increasing Research Activities

| Form 6765 | Amount |
| --- | --- |
| Line 20: QREs this year | $251,700 |
| Line 21: QREs, the three prior years | None in at least one of them |
| Lines 22–23 | Skipped: a prior year had none |
| Line 24: 6% of line 20 | $15,102 |

Northwind's hypothetical 2027: no QREs in any of the three prior years, so the 6% rule.

**Scenario — 2030, with three prior years.** By 2030 Northwind has three years of history. QREs of $420,000 against a prior three-year average of $303,900: half of that, $151,950, comes off, and 14% of the $268,050 above it is $37,527.

| Form 6765 | Amount |
| --- | --- |
| Line 20: QREs this year | $420,000 |
| Line 21: the three prior years | $251,700 + $300,000 + $360,000 |
| Line 22: line 21 ÷ 6 | $151,950 |
| Line 23: line 20 − line 22 | $268,050 |
| Line 24: 14% of line 23 | $37,527 |

2030, hypothetical.

## The regular credit

The [regular credit](https://lopifi.com/md/glossary/regular-research-credit) is 20% of QREs above a base amount: a fixed-base percentage times the average gross receipts of the four prior years. A start-up's fixed-base percentage is set by statute for its first years with QREs, and the base can never be less than 50% of the year's QREs. So the regular credit is at most 10% of the year's QREs, and it needs a gross receipts history the ASC doesn't.

— [IRC §41(a), (c)(1)–(3)](https://www.law.cornell.edu/uscode/text/26/41), The regular credit: 20% of QREs over a base amount

> **Figure both.** For Northwind's first year the regular credit could beat the ASC. With almost no gross receipts in the four prior years, its base would sit at the floor, half of this year's QREs, and the regular credit would be at most $25,170 against the ASC's $15,102. Whether it reaches that depends on rules for a company that hasn't existed four years, which are its preparer's to apply. The point is the instructions': figure both.

> “You may want to figure your credit using both of the methods for which you are eligible to get the maximum credit allowed.”

— [Instructions for Form 6765 (Rev. December 2025), Specific Instructions](https://www.irs.gov/pub/irs-pdf/i6765.pdf) (PDF), The regular credit or the ASC: figure both

**Alternative simplified credit**
- Pro: Needs only three years of QREs, no gross receipts history
- Pro: The arithmetic fits on four lines
- Con: 6% until there are three years with QREs
- Con: Once elected, it applies to later years unless revoked
- Best for: A company with a few years of QREs that keep growing

**Regular credit**
- Pro: A 20% rate
- Pro: No three-year QRE history needed
- Con: Needs gross receipts for the four prior years and a fixed-base percentage
- Con: Never more than 10% of the year's QREs
- Best for: A young company with little gross receipts, where the floor sets the base

Two methods, one credit.

> **Electing the ASC.** The ASC is elected by completing Section B on a timely filed original return. An amended return can elect it only for a year that never claimed the credit.

> “An ASC election can be made on an amended return for a tax year only if you hadn’t previously claimed the research credit on an original return or amended return for that tax year.”

— [Instructions for Form 6765 (Rev. December 2025), Section B](https://www.irs.gov/pub/irs-pdf/i6765.pdf) (PDF), Electing the alternative simplified credit

> **One more choice: the reduced credit.** Section 280C makes the credit and the research deduction overlap less: either the deduction is cut by the credit, or the credit is taken at 79%, here $11,930.58. [The §280C page](https://lopifi.com/md/learn/section-174a-and-the-rd-credit/section-280c-reduced-credit) works it through.

*[Figure: rd credit]*

The still at 6%: Northwind's first credit year.

> **The ASC is 14% of QREs above half the prior three years' average, and 6% of all QREs until there are three years of history.**

## Where this lesson's rules come from

- [IRC §41(c)(4)(A)](https://www.law.cornell.edu/uscode/text/26/41) — The alternative simplified credit (statute)
- [Form 6765 (Rev. December 2024), Section B, line 24](https://www.irs.gov/pub/irs-pdf/f6765.pdf) (PDF) — Form 6765, Credit for Increasing Research Activities (form)
- [IRC §41(a), (c)(1)–(3)](https://www.law.cornell.edu/uscode/text/26/41) — The regular credit: 20% of QREs over a base amount (statute)
- [Instructions for Form 6765 (Rev. December 2025), Specific Instructions](https://www.irs.gov/pub/irs-pdf/i6765.pdf) (PDF) — The regular credit or the ASC: figure both (irs)
- [Instructions for Form 6765 (Rev. December 2025), Section B](https://www.irs.gov/pub/irs-pdf/i6765.pdf) (PDF) — Electing the alternative simplified credit (irs)

## Read further

- https://lopifi.com/md/startups/rd-tax-credit-and-section-174
- https://lopifi.com/md/accounting/rd-tax-credit

- **Track:** [R&D tax credit](https://lopifi.com/md/learn/rd-credit)
- **Lesson:** Lesson 4 of 9 — 10 min
- **Terms taught:** [Alternative simplified credit](https://lopifi.com/md/glossary/alternative-simplified-credit), [Regular research credit](https://lopifi.com/md/glossary/regular-research-credit), [Qualified research expenses](https://lopifi.com/md/glossary/qualified-research-expenses), [Form 6765](https://lopifi.com/md/glossary/form-6765)
- **Previous:** [Qualified research expenses: wages, supplies and contractors, R&D credit · Lesson 3](https://lopifi.com/md/learn/what-counts-as-qualified-research-expenses)
- **Next:** [Taking the credit against payroll tax, R&D credit · Lesson 5](https://lopifi.com/md/learn/rd-credit-against-payroll-tax)
- **The course:** https://lopifi.com/md/learn