R&D Tax Credits for Controlled Groups: Aggregation and Allocation Strategies

Key Takeaways:

Related entities in a controlled group (such as parent-subsidiary or brother-sister structures under IRC Section 41(f)) are treated as a single taxpayer for R&D tax credit purposes. This requires aggregating qualified research expenses (QREs) across the group, computing the credit once, and allocating it pro rata. Proper handling maximizes federal credits (up to 20% under the Regular Method or 14% under the ASC Method) and supports state claims in over 35 states, while avoiding disallowed claims or penalties amid heightened IRS scrutiny in 2025.

• Understanding Controlled Groups - A controlled group exists with more than 50% common ownership (parent-subsidiary) or when the same five or fewer owners hold at least 80% of entities with over 50% identical ownership (brother-sister). Ownership is tested as of December 31, and rules apply to corporations, LLCs, and partnerships.
• Why Aggregation Matters - Combining QREs (wages, supplies, contract research) at the group level increases the base for credit calculations and often yields higher total credits. For example, one tech group boosted its claim from $120,000 (standalone) to $532,000 through proper aggregation.
• The Four Key Steps to Claiming Credits
  1. Aggregate all group QREs (disregard intragroup payments and exclude funded research).
  2. Compute the group credit using a uniform method (elected on the original return).
  3. Allocate the credit pro rata based on each entity's share of total QREs.
  4. Report the allocated portion on Form 6765 with full group disclosures.
• Common Pitfalls to Avoid - Ignoring common ownership, using inconsistent methods across entities, double-counting funded QREs, or providing weak documentation can reduce credits or trigger audits. Annual ownership reviews and centralized tracking prevent these issues.
• Best Practices for Optimization - Map ownership annually (especially after M&A), track QREs by entity, centralize credit computations, integrate with accounting systems, and review state conformity for additional benefits.

Mastering these rules can unlock substantial tax savings and strengthen audit defense. Read on for detailed examples, filing guidance, and 2025 Form 6765 updates.

Introduction

Many U.S. companies operate through multiple entities, including LLCs, holding companies, or subsidiaries, to manage liability, optimize funding, or streamline operations. Individual taxpayers may own one or more companies with partners, family, or friends. This can create related entities for tax purposes under federal and state tax codes, which have special rules when claiming the R&D tax credit for their businesses or as passthrough owners. For R&D tax credits, the IRS treats related entities as a single taxpayer under IRC Section 41(f) when they qualify as a controlled group. This allows qualified research expenses (QREs) to be aggregated and the resulting credit to be allocated across entities in a fair and compliant way.

Understanding these aggregation rules can make a major difference. IRS examiner guidance notes that many multi-entity businesses miss legitimate credits because they file separately when a single combined calculation should apply. Failure to follow these rules can result in disallowed credits and potential penalties. Companies should file Form 6765 with proper treatment of expenses across entities within the group, including disclosure of all entities in the controlled group and each member’s qualified research expenses.

What Is a Controlled Group for R&D Tax Credits?

Direct answer: A controlled group exists when two or more entities, including corporations, LLCs, or partnerships, share more than 50 percent common ownership as defined under IRC Section 41(f)(5) and Treas. Reg. § 1.41-6. A controlled group can also exist when five or fewer persons own at least 80 percent of two or more entities and have more than 50 percent identical ownership. That is the brother-sister test imported from IRC Section 1563. Group membership is determined as of December 31 of the taxable year under IRC Section 1563(b). Aggregation can apply to corporations, partnerships, and LLCs through the rules of Sections 1563 and 52.

Understanding the examples

In the table below, generic names such as Entity A or Subsidiary A and B are used only for illustration. They represent typical ownership structures that determine whether multiple businesses must aggregate R&D activities for credit purposes.

These ownership tests apply consistently when computing the federal R&D credit, with non-corporate entities included under common control rules.

How Controlled Groups Claim the R&D Credit

Follow these four steps to properly aggregate and allocate R&D credits across a controlled group.

1) Aggregate QREs

Combine qualified research expenses across entities that perform qualified activities, including wages, supplies, and contract research. Exclude funded research under IRC Section 41(d)(4)(H). Inside the group, intragroup payments are generally disregarded: the performing entity claims its in-house QREs and the payor does not claim contract research for intragroup work under Treas. Reg. Section 1.41-6(i)(2). For third-party contracts, the claimant depends on who bears financial risk and retains substantial rights.

2) Compute the group credit

• Regular Method: 20 percent of QREs above the fixed base under IRC Section 41(a)(1).
  
• ASC Method: 14 percent of QREs above 50 percent of the average from the prior three years under IRC Section 41(c)(5).

All members must use the same method. The ASC election must be made on a timely filed original return and continues until revoked prospectively. It cannot be made on an amended return, and there is no late-election relief under Treas. Reg. Section 301.9100-3.

3) Allocate pro rata

Distribute the total credit based on each entity’s contribution:
Entity allocation = (Entity QRE ÷ Total QRE) × Total Credit.‍

4) File using Form 6765

Each entity files its share, indicates controlled group status, and attaches computations showing each member’s QREs, credit percentage, and allocation. See the January 2025 Instructions for Form 6765. For tax years beginning in 2025, Section G’s business-component reporting is optional per IRS announcement IR-2025-99. If completing Section G, list components in descending order until at least 80 percent of QREs are covered, up to 50 components per entity, and aggregate the remainder. Section G becomes mandatory for tax year 2026, with certain exceptions for small businesses .IRS Form 6765 Instructions (January 2025)‍

How Aggregation Multiplied a Group’s R&D Credits

A fictional example for demonstration purposes

A tech group with three entities had only the testing entity claiming about 120,000 dollars per year in R&D credits. All three entities had identical ownership among four shareholders, creating a brother-sister controlled group under IRC Section 41(f)(5).

After proper aggregation and allocation:

• Total QREs: $5.8M dollars combined.
  
• Calculated group credit: $532,000 using the ASC method
  Computation: 14% of the excess over 50% of a $4M average.
  Excess equals $5.8M minus $2.0M equals $3.8M.
  
• Allocation: Manufacturing $2.5M QREs → $229,310. Testing $2.3M→ $210,966. Software $1.0M → $91,724.
  
• Outcome: Total credits rose from $120,000 to $532,000 due to proper aggregation and documentation.
  Numbers rounded for clarity.

Common Mistakes in Controlled-Group R&D Credit Filings

Best Practices for Controlled-Group Planning

• Update ownership mapping annually, especially after M&A or reorganizations.
  
• Track QREs by performing entity to avoid duplication.
  
• Centralize the group’s R&D credit computation and maintain consistent methods.
  
• Use accounting integrations to tie wages and supply costs to R&D activities.
  
• Review state rules. More than 35 states offer R&D credits, and many follow federal aggregation principles. Specific rules vary by state, including California.

Quick Wins

• Conduct a controlled-group ownership review within 60 days after any M&A event.
  
• Amend open tax years, generally up to three prior years, for eligible adjustments under IRC Section 6511.
  
• Maintain a unified R&D ledger for all entities to simplify future filings.
  

Why Controlled-Group Planning Matters

Aggregating R&D activities across related entities often increases available credits for multi-entity groups. With Form 6765’s 2025 emphasis on business-component detail, strong documentation and consistent credit methods are essential for optimization and audit readiness.

Final Thoughts

Controlled-group aggregation turns complex ownership structures into significant R&D opportunities. By following IRS guidance, aggregating QREs correctly, and allocating credits transparently, multi-entity organizations can secure substantial federal and state tax savings while staying fully compliant.

‍Want to confirm your eligibility?
Request a 2025 R&D credit review with our team at Strike Tax Advisory.

‍Official Sources:

• IRS – Form 6765 (Credit for Increasing Research Activities)
  
• IRS – Instructions for Form 6765 (2025)
  
• Treas. Reg. § 1.41-6 – Controlled Group Rules 

Disclaimer: This article is for general informational purposes only and does not constitute tax advice.