ASC vs Regular Credit Method

IRC Section 41 provides two methods for calculating the R&D tax credit: the Regular Credit (RC) and the Alternative Simplified Credit (ASC). Both methods arrive at a credit amount based on your qualified research expenses (QREs), but they use different formulas and historical baselines.

You choose which method to use each tax year — the election is annual, not permanent.

Formula: 20% × (Current year QREs − Base amount)

The base amount is calculated as: Fixed-base percentage × Average annual gross receipts for the prior 4 years.

The fixed-base percentage is determined by your QRE-to-gross-receipts ratio during 1984–1988 (for companies that existed then) or uses a start-up formula for newer companies.

Pros: Higher credit rate (20% vs 14%). Can produce a larger credit if your base amount is low. Cons: Requires historical data. The base amount calculation is complex. Many CPAs avoid it for smaller clients.

Formula: 14% × (Current year QREs − 50% of average QREs for the prior 3 years)

If you have no QREs in any of the three prior years, the credit is 6% of current year QREs.

Pros: Simpler calculation. No need for data from the 1980s. Most tax preparers are comfortable with it. Cons: Lower credit rate (14% vs 20%). The 50% average baseline means you need growing R&D spending to maximize the credit.

Choose ASC if: - You're a startup or have been in business fewer than 5 years - You don't have reliable QRE data from the 1980s - Your R&D spending is relatively consistent year over year - You want the simplest, most defensible calculation

Choose Regular Credit if: - You have complete historical data - Your base amount is very low relative to current QREs - You've run both calculations and RC produces a larger credit

In practice: The vast majority of small-to-mid software companies use the ASC. It's simpler, it's easier to defend in an audit, and for first-time claimants the 6% startup rate provides an immediate benefit.

quarryFi computes your estimated credit under both methods and recommends the one that produces the larger benefit. When you generate your Form 6765 documentation package, both calculations are included so your CPA can make the final election.