Intercompany Eliminations: Alaska R&D Tax Credit
Intercompany eliminations remove internal transactions between related entities to prevent the artificial inflation of Qualified Research Expenses (QREs). In Alaska, this ensures credits are claimed only on the economic reality of innovation, not on money moving between subsidiaries.
When filing for the Research & Development (R&D) Tax Credit in Alaska, businesses often operate as part of a larger controlled group or unitary business. A common pitfall involves treating payments between these group members as valid "Contract Research Expenses."
Without strict adherence to Intercompany Elimination rules, a company might accidentally claim a credit on a payment made to a sister company, while the sister company also claims a credit on the wages paid to perform that work. This is known as "double dipping," and it is the primary target of auditors reviewing Alaska Form 6300 (Research & Development Tax Credit).
Legal Basis
IRC § 41(f)
Adopted by Alaska Stat. 43.20.021 for controlled groups.
Audit Risk
High
Intercompany transactions are the first line item scrutinized.
Impact
100% Netting
Internal "Contract Research" is netted to zero; only underlying wages count.
The Anatomy of an Elimination
Interact with the diagram below to understand how the "Single Taxpayer Rule" treats transactions within a unitary group.
Parent Corp
Cash Outflow
-$1,000,000
Intercompany Fee
Subsidiary B
Actual Cost
$750,000
Wages Paid to Engineers
Total Group Credit Base
⚠️ DOUBLE DIPPING: Counting both the payment and the wages.
Alaska Revenue Guidance
Alaska operates under a specific set of statutes that bind it closely to the federal Internal Revenue Code (IRC), but with strict requirements for unitary businesses.
Unlike some states that allow separate reporting for all entities, Alaska requires Unitary Combined Reporting for oil and gas corporations and for other corporations unless a "Water's Edge" election is distinct.
AS 43.20.021
Expressly adopts IRC provisions. This means federal regulations regarding "Controlled Groups" (IRC § 41(f)) apply directly to Alaska calculations.
15 AAC 20.300
Requires combined reporting for unitary businesses. Intercompany dividends, interest, and *service fees* (like R&D payments) are eliminated.
Treas. Reg. § 1.41-6(i)
Federal regulation stating intercompany transactions are disregarded. The "Group" is treated as a single taxpayer.
Guidance Explorer
The "One Pocket" Rule
In a unitary business, the entities are economically integrated. Alaska takes the position that you cannot generate a tax credit by paying yourself.
Compliance Impact Simulator
Enter your data to see the difference between "Gross" and "Net" QREs.
Input Financials
Valid expenses paid to unrelated parties.
Amounts paid to subsidiaries/parent.
Actual wages incurred by the payee.
Credit Base Comparison
Analysis: By failing to eliminate, you risk overstating your base by $200,000. The statutes require you to look through the $1M payment and only claim the $800k in underlying wages.
Conclusion & Strategic Takeaway
Intercompany eliminations are not optional; they are a fundamental mechanic of the unitary business principle in Alaska tax law. While they reduce the gross amount of expenses listed on the return, they secure the integrity of the credit.
Expert Report: Intercompany Eliminations and Tax Credit Sourcing for Alaska R&D Compliance
I. Introduction and Conceptual Foundation
1.1. Defining Intercompany Eliminations: The Dual Perspective
Intercompany elimination is the process used by a parent company to remove internal transactions between subsidiary companies in a corporate group when preparing consolidated financial statements. This process ensures that financial results accurately reflect only transactions with external third parties, preventing the double-counting of revenues, expenses, and profits that remain within the consolidated entity.1
This fundamental accounting procedure is critical for adhering to financial reporting standards such as Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS).2 By treating the corporate group as a single economic unit, eliminations prevent inflated figures for revenue, assets, and liabilities that would otherwise result from internal transfers of funds or goods.2 When a subsidiary records revenue from a related entity, and the paying entity records an expense, the elimination process cancels out these reciprocal entries, ensuring that stakeholders receive a clear and accurate view of the group’s true performance derived solely from transactions with the outside world.2
However, when addressing specialized tax incentives like the R&D credit, the term “intercompany elimination” takes on a distinct regulatory meaning. For tax purposes, elimination is not merely an accounting adjustment but a mandatory rule of cost sourcing dictated by federal law, requiring taxpayers to look beneath the intercompany charge to identify and attribute the underlying external research costs.
1.2. The Alaska R&D Tax Credit in Context: A Federally Based Incentive
The Alaska R&D Tax Credit is not a standalone credit calculated under unique state rules; rather, it is a derivative incentive, defined entirely by reference to the federal research credit provisions of the Internal Revenue Code (IRC).4 Alaska offers a credit equivalent to 18% of the calculated federal IRC Section 38 eligible tax credits, provided the federal credit is properly apportioned to Alaska.4
The qualification standards for expenditures under the Alaska credit are explicitly the same as those defining Qualified Research Expenditures (QREs) under IRC § 41.6 This includes adherence to the four-part test used at the federal level: the expenses must be for a qualified purpose (creating or improving a product), eliminate uncertainty, involve a process of experimentation, and relate to a business component.4 Furthermore, while a company must conduct business in Alaska to claim the credit, the qualified activities themselves need not be conducted within Alaska; they only need to be conducted within the United States.4 This structural reliance on the federal code makes strict compliance with federal controlled group rules paramount for all multi-entity taxpayers seeking the Alaska credit.
1.3. Objective of the Report: Reconciling Financial Reporting vs. Tax Compliance for QREs
Corporate organizational structures often involve centralized R&D departments or subsidiaries that perform research services and subsequently bill operating entities for those costs, often with a mark-up. From a financial reporting standpoint, these intercompany charges are routinely eliminated to neutralize internal profits.3 For tax purposes, specifically under IRC § 41, the federal regulations impose a mandatory cost-sourcing rule for controlled groups. This rule functionally eliminates the billed intercompany transaction price and mandates the aggregation of the underlying costs—primarily wages and supplies—incurred by the entity that physically performs the research.8
This report details the mechanics of this specialized tax elimination, illustrating how these federal regulations govern the initial calculation of the Qualified Research Expense base, which is then used by the Alaska Department of Revenue (DOR) to calculate the final state credit claimed on Form 6390.6
II. Intercompany Eliminations in Consolidated Financial Reporting (The Accounting View)
2.1. Accounting Requirement: The Principle of the Single Economic Entity
Financial reporting mandates that when a parent company prepares consolidated statements, it must reflect the entire group’s activity as if it were one single taxpayer operating with third parties.2 This objective is achieved by ensuring that only profits or losses realized through a transaction with an entity outside the consolidated group are recognized.1
Failure to apply proper intercompany eliminations compromises financial accuracy, leading to an overstatement of revenue, assets, and overall performance metrics. Such overstatement can misinform investors and other stakeholders regarding the true financial health of the enterprise and may result in regulatory compliance issues.2 To prevent intercompany transactions from inadvertently slipping through the cracks, robust internal controls, often supplemented by advanced software like Enterprise Performance Management (EPM) systems, are deployed to flag and manage internal transactions across all subsidiaries.1
2.2. Common Intercompany Transaction Types Subject to Elimination
Intercompany eliminations are broadly applied across the consolidated financial statements:
- Intercompany Revenue and Expenses: Transactions involving the sale of goods or the provision of services between affiliates must be eliminated. For instance, if Subsidiary A sells $10,000 worth of services to Subsidiary B, Subsidiary A records revenue and Subsidiary B records an expense. Consolidated statements must cancel both entries to avoid inflating the group’s revenue and expense figures by $10,000.2 This principle applies directly to internal charges for R&D services, management fees, royalty charges, and cost allocations.3
- Intercompany Debt and Loans: Any loans made between subsidiaries, resulting in reciprocal receivables and payables on the individual balance sheets, must be eliminated upon consolidation to present a true picture of the group’s external debt exposure.1
- Profit in Inventory (PII): Internal profits arising from the sale of inventory between subsidiaries must be eliminated from the consolidated financial statements until that inventory is subsequently sold to an external third party. This elimination prevents the premature recognition of profit that has not been realized through an arm’s-length transaction outside the group.10
III. The Federal Regulatory Framework: Intercompany QRE Treatment under IRC § 41
3.1. The Controlled Group Rule: Treating Multiple Entities as a Single Taxpayer
The federal R&D tax credit regime is structured to prevent controlled groups from manipulating the QRE calculation base or exploiting the definition of funded research. Pursuant to IRC § 41(f)(1), all members of a controlled group of corporations or trades or businesses under common control must be treated as a single taxpayer for computing the research credit.11
A controlled group is generally defined as two or more entities sharing more than 50% common ownership.14 When determining the credit:
- Aggregation: The group first aggregates all QREs across all members to determine the total Group Credit.11 This involves calculating the credit using either the Regular Research Credit (RRC) or the Alternative Simplified Credit (ASC) method based on the aggregated QREs and gross receipts.16
- Allocation: Once the total Group Credit is computed, it is then allocated back to the individual members of the group. The allocation is determined on a proportionate basis, reflecting each member’s share of the aggregate QREs that were taken into account by the controlled group for the taxable year.8
This framework ensures that the credit is calculated once at the group level, preventing taxpayers from claiming more than the legally allowable benefit.8
3.2. Tax-Specific Elimination: Treasury Regulation § 1.41-6(i)(2) Deep Dive
The core compliance mechanism for intercompany research activities is outlined in Treasury Regulation § 1.41-6(i)(2). This provision provides precise instructions on how to handle research services performed by one controlled group member on behalf of another. The rule achieves the required elimination for tax purposes by sourcing the expense to the entity that actually paid the external cost, effectively disregarding the internal billing arrangement.8
A. The Performer’s Treatment (Sourcing the QRE)
The member of the group that physically performs the qualified research (e.g., the R&D subsidiary) must include in its QREs any in-house research expenses for that work, which encompass wage payments to researchers and direct supply costs.8
Crucially, the performing member shall not treat any amount received or accrued from the related entity as funding the research.8 This provision is vital because, generally, research funded by another person is disqualified from being a QRE. By exempting intercompany reimbursements from this disqualifying funded research rule, the regulation permits the performing entity to include its underlying external costs in the aggregated QRE base.
B. The Payer’s Treatment (Eliminating the Charge)
Conversely, the member for whom the research is performed (the entity receiving the bill) shall not treat any part of any amount paid or incurred as a contract research expense.8
This mandate confirms the tax-specific elimination. If the paying entity were permitted to include the internal charge as a contract research expense (which is normally included at a rate of 65% for external contractors), the group would effectively double-count the research activity: once via the performing entity’s wages/supplies (100% inclusion) and again via the paying entity’s contract expense. This regulation ensures that only the external costs paid by the group (the wages and supplies) are counted once in the aggregate QRE base.
3.3. Contrasting Financial Elimination vs. Regulatory Tax Sourcing
The divergence between the financial accounting goal of ledger neutrality and the tax regulatory goal of cost sourcing requires tax teams to utilize different source documents and accounting principles when calculating QREs. The critical difference is that tax compliance requires looking through the intercompany invoice to the underlying costs, whereas GAAP focuses solely on eliminating the invoice amount.
Table 1: Contrasting Financial Elimination vs. Regulatory Tax Sourcing
| Feature | Financial Accounting Elimination (GAAP/IFRS) | Tax Compliance (IRC § 41) |
| Primary Focus | Eliminating internal profits and balancing ledgers. | Sourcing QREs to external payroll and supply costs. |
| Data Basis for Elimination | Intercompany Invoice/Billed Amount. | Underlying external wages and supplies paid by the performer. |
| Performer’s Revenue Treatment | Revenue is recorded, then eliminated upon consolidation. | Reimbursement revenue is disregarded (not classified as “funded research”). |
| Payer’s Expense Treatment | Expense is recorded, then eliminated upon consolidation. | Payment is explicitly excluded from Contract Research Expenses. |
IV. The Alaska R&D Tax Credit: Integration of Federal Rules and State Guidance
4.1. Alaska Statutory Authority and Credit Value
The Alaska R&D Tax Credit is claimed against the taxpayer’s corporation net income tax liability.5 The state credit is equal to $1.50 per 1,000 cubic feet of qualified gas storage capacity, or, more commonly for R&D based on IRC § 41, it is limited to 18% of the federal credit apportioned to Alaska.5
The credit is not refundable but can be carried back one year and forward for up to 20 years.5 This extended carryforward period provides a valuable, long-term offset against future tax liabilities. Furthermore, the credit is one of the federal-based credits that may offset Alaska alternative minimum tax (AMT), but only after any Alaska incentive credits have already been applied.6
4.2. Alaska Department of Revenue (DOR) Compliance: Consolidated and Unitary Rules
Alaska utilizes the unitary business principle in its tax code, which dictates how related entities must file their returns, thereby reinforcing the federal controlled group calculation.
Pursuant to the Alaska Administrative Code (15 AAC 20.100), taxpayers that engage in a unitary business and join in filing a consolidated federal return shall file a consolidated Alaska return.19 This mandatory consolidation requirement means that the state return must encompass the financial activities of all members of the unitary group.
For a multi-entity business that is taxable both inside and outside of Alaska, the aggregate federal credit base must be appropriately apportioned to the state.5 Apportionment is the mechanism by which Alaska ensures that the credit benefit claimed is commensurate with the business’s economic presence within the state. Because the federal QRE definition is used, R&D wages paid outside of Alaska can still generate a credit for the Alaska unitary group, subject to the state’s apportionment factor.4
4.3. Claiming the Credit: Alaska Form 6390 – Federal-Based Credits
The formal method for claiming the Alaska R&D Tax Credit involves filing Alaska Form 6390 – Alaska Federal-Based Credits alongside the corporate income tax return.4
This form operationalizes the limitation and apportionment rules:
- The taxpayer starts by entering the Federal general business credit (GBC) amount determined under IRC § 38 from federal Form 3800.20 This figure represents the total credit available after the federal controlled group aggregation and allocation rules (including the elimination of intercompany charges) have been applied.
- The federal GBC applicable to Alaska is then determined.20
- The taxpayer applies the Alaska apportionment factor (Line 6 on Form 6390) to the total federal GBC applicable to Alaska.20
- Finally, the credit is limited by multiplying the apportioned federal credit amount (Line 7) by 18% (Line 8), yielding the maximum allowable Alaska credit.9
This systematic application of the apportionment factor to the federally calculated credit base is essential for accurately claiming the state tax benefit.
V. Practical Case Study: Controlled Group R&D and Alaska Credit Calculation
This scenario illustrates the flow of QREs from the point of intercompany charge to the final Alaska credit calculation, emphasizing the mandatory steps of elimination and allocation.
5.1. Scenario Definition: Multi-Entity Group with Intercompany R&D Charges
Controlled Group XYZ is a unitary business comprised of three members:
- Sub R&D (Nevada): Centralized R&D Center. Performs all core research.
- External Costs (In-House QREs): $3,000,000 (Wages to external researchers and supplies).
- Sub Op-AK (Alaska): Alaska Operating Entity. Incurs internal R&D wages of $200,000. Is billed $1,800,000 by Sub R&D for centralized services.
- Sub Op-WA (Washington): Washington Operating Entity. Incurs $0 in-house QREs. Is billed $1,200,000 by Sub R&D.
Financial Accounting Note: On the consolidated ledger, the $3,000,000 total intercompany revenue and expense would be eliminated.
Tax Assumptions: Total Controlled Group QREs are $3,200,000. The calculated Federal Group Credit is $320,000 (using a hypothetical 10% RRC rate). The Alaska Apportionment Factor is 45%.
5.2. Step 1: Federal Aggregation and Intercompany QRE Sourcing (The Elimination)
For R&D tax credit purposes, the three intercompany charges totaling $3,000,000 are disregarded, preventing double-counting. The QREs are sourced to the entity that paid the ultimate external cost, per Treas. Reg. § 1.41-6(i)(2).
- Sub R&D recognizes its $3,000,000 of external QREs. The $3,000,000 payment received is not treated as “funded research.”
- Sub Op-AK recognizes its $200,000 of in-house QREs but does not recognize the $1,800,000 payment as a contract research expense.
- Sub Op-WA recognizes $0 QREs and does not recognize the $1,200,000 payment as a contract research expense.
The total aggregate QRE base for the group is $\$3,000,000 + \$200,000 = \$3,200,000$.
5.3. Step 2: Allocation of Federal Credit Among Group Members
The calculated Group Credit of $320,000 is allocated based on each member’s contribution to the $3,200,000 QRE base.8 The result of this allocation establishes the Federal GBC amount available for state apportionment.
Table 2: Federal R&D Controlled Group Allocation and QRE Sourcing
| Controlled Group Member | In-House QREs (Tax Basis) | Proportionate Share of Total QREs ($3,200,000) | Allocated Federal Credit ($320,000 Total) |
| Sub R&D (Nevada Performer) | $3,000,000 | 93.75% | $300,000 |
| Sub Op-AK (Alaska Taxpayer) | $200,000 | 6.25% | $20,000 |
| Sub Op-WA (Washington Payer) | $0 | 0.00% | $0 |
| Controlled Group Totals | $3,200,000 | 100.00% | $320,000 |
The entire federal credit of $320,000 flows to the consolidated group’s tax return, ready for apportionment and application against the group’s Alaska liability.
5.4. Step 3: Alaska R&D Tax Credit Determination (Form 6390 Application)
Since Group XYZ files a consolidated Alaska return (mandatory under 15 AAC 20.100), the total allocated Federal GBC of $320,000 is used as the starting point for Alaska Form 6390.20
Table 3: Alaska R&D Tax Credit Computation and Apportionment (Form 6390 Application)
| Form 6390 Input/Output | Description/Source | Value |
| 1. Total Federal GBC (Line 5 Input) | Aggregate Group Credit allocated to the filing group | $320,000 |
| 2. Alaska Apportionment Factor (Line 6) | State Apportionment Factor for Unitary Group | 45% |
| 3. Apportioned Federal Credit Applicable to Alaska (Line 7) | $320,000 $\times$ 45% | $144,000 |
| 4. Alaska R&D Credit Allowed (Line 8) | 18% of Apportioned Federal Credit (0.18 $\times$ $144,000) 6 | $25,920 |
The final Alaska R&D Tax Credit claimable by the consolidated group is $25,920. This result illustrates how the federal elimination rule allows the group to leverage QREs generated primarily in Nevada for a significant state credit benefit in Alaska, facilitated by the unitary filing and the apportionment mechanism.
VI. Conclusion and Strategic Compliance Recommendations
6.1. The Necessity of Tracing Costs Over Charges
Effective compliance with both federal and Alaska R&D tax credit requirements hinges on the nuanced understanding of intercompany transactions. For tax purposes, the standard accounting elimination of an intercompany invoice is insufficient. Taxpayers must execute the specific federal mandate under Treas. Reg. § 1.41-6(i)(2), which requires tracing the ultimate expenditures back to the performing entity and sourcing only the external costs (wages and supplies) paid by that entity.
This cost-sourcing approach ensures that only true external R&D investment is counted in the QRE base, preventing inflation and inappropriate claiming of the credit. Because the Alaska credit is directly derived from the federally determined and apportioned credit amount, accurate federal tax elimination is the foundational step for a successful and defensible Alaska claim.4
6.2. Alaska Department of Revenue Documentation Requirements
To substantiate the Alaska R&D credit claimed on Form 6390, the taxpayer must maintain meticulous documentation that bridges the gap between intercompany financial reporting and tax calculation. The Alaska DOR requires proof that the expenses meet the four-part test for qualification and demands the filing of Form 6390 along with the state return.4
Comprehensive documentation must include:
- Federal Forms: Copies of the consolidated federal Forms 6765 (Credit for Increasing Research Activities) and 3800 (General Business Credit), which confirm the aggregated QREs and the calculated Group Credit.6
- Cost Sourcing Detail: Detailed internal ledgers, payroll records, and project documentation for the performing entity (Sub R&D in the case study) to verify the external wages and supply costs that constitute the QREs, proving that the intercompany reimbursement was correctly ignored.4
- Unitary and Apportionment Records: Records supporting the unitary nature of the business and the calculation of the Alaska apportionment factor, which is essential for determining the legitimate portion of the credit attributable to the state.5
6.3. Summary of Alaska R&D Tax Credit Benefits and Limitations
The Alaska R&D Tax Credit serves as a significant incentive for businesses operating within a unitary structure, allowing them to leverage the collective R&D investment across the entire controlled group.
Table 4: Summary of Alaska R&D Tax Credit Benefits and Limitations
| Feature | Description | Compliance Impact |
| Credit Rate | 18% of the calculated federal credit amount, after apportionment.6 | Provides a dollar-for-dollar offset against Alaska tax liability.5 |
| QRE Source | Must meet IRC § 41 definition, including mandatory intercompany cost sourcing.6 | Requires tax teams to trace actual payroll and supplies, disregarding intercompany charges. |
| Location | Research activity can occur outside of Alaska (within the U.S.).4 | Allows non-Alaska R&D centers to contribute to the QRE base, benefiting the Alaska unitary taxpayer via apportionment. |
| Filing Structure | Mandatory consolidated filing for unitary groups.19 | Ensures maximum potential federal credit aggregation and equitable state apportionment of the resulting benefit. |
| Credit Carryover | Unused credits carry back one year and forward 20 years.5 | Secures tax benefits for high-growth companies that may not immediately utilize the credit. |
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What is the R&D Tax Credit?
The Research & Experimentation Tax Credit (or R&D Tax Credit), is a general business tax credit under Internal Revenue Code section 41 for companies that incur research and development (R&D) costs in the United States. The credits are a tax incentive for performing qualified research in the United States, resulting in a credit to a tax return. For the first three years of R&D claims, 6% of the total qualified research expenses (QRE) form the gross credit. In the 4th year of claims and beyond, a base amount is calculated, and an adjusted expense line is multiplied times 14%. Click here to learn more.
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