House to Consider Making R&E Tax Credit PermanentMay 19, 2015
On Wednesday, May 20, the House is expected to vote on the American Research and Competitiveness Act of 2015 (H.R. 880) introduced by Reps. Kevin Brady (R-Texas) and John Larson (D-Conn.) that will improve and make permanent the Research and Experimentation (R&E) tax credit, retroactive to Dec. 31, 2014, when the credit expired. The R&E tax credit is designed to create an incentive for businesses to invest in research.
The R&E credit is one of the “tax extenders,” a set of federal tax provisions that expired on Dec. 31, 2014, but have routinely been extended, expired and renewed in the past. Since it was introduced in 1981, the credit has been extended 16 times and has been allowed to expire nine times. When it has expired, the credit has almost always been retroactively reinstated to provide continued benefits to taxpayers.
H.R. 880 would also strengthen the credit by increasing the easier-to-use alternative simplified credit from 14 percent to 20 percent. In order to make it easier for small businesses to take advantage of the credit, H.R. 880 allows eligible companies to use R&E credits to offset both their regular tax and any alternative minimum tax (AMT) liability. For start-up businesses, the bill increases from six percent to 10 percent the credit for those companies that do not have research expenses in the past three years that generally are needed to calculate eligibility for the full credit.
In general, the R&E credit incentivizes research activities by reducing tax liabilities for companies that spend money on that research, which lowers the after-tax cost of those activities. The credit is equal to a certain percentage of a business’ qualified research expenses in excess of a base amount. The credit can be claimed either by corporations that pay taxes or by shareholders in S-corporations or other types of pass-through entities that place corporate income, losses, and credits onto their owners’ tax returns.
The full value of the credit can only be claimed by taxpayers with sufficient tax liabilities, however, because it is not refundable. Taxpayers can carry the credit back one year and forward for 20 years, so even if a taxpayer can’t apply the full benefit of the credit in the current tax year, some flexibility is available.
Over the years, many have urged Congress to make the credit more generous in order to prevent the U.S. from falling farther behind nations that offer heftier tax incentives for research. They also want lawmakers to make the credit simpler and easier for smaller companies to claim. Most of all, however, advocates—including NSBA—have called for making the R&E credit a permanent part of the tax code, rather than a temporary provision that must be renewed every few years. This impermanence has created uncertainty for companies—especially small businesses—trying to make long-term investment decisions.