R&E Tax Credit To Be Considered on House FloorMay 7, 2014
The House is set to vote in the next day or so on making the research and experimentation (R&E) tax credit permanent. The American Research and Competitiveness Act of 2014 (H.R. 4438), introduced by Reps. Kevin Brady (R-Texas) and John Larson (D-Conn.) provides a strengthened, permanent R&E credit, retroactive to the beginning of 2014. Meanwhile, the Senate is planning a vote on a larger package temporarily extending nearly all of the expired tax breaks (S. 2260) in the next two weeks.
This clearly demonstrates how the House and Senate are taking different approaches to the tax extenders that expired at the end of 2013. In early April, the Senate Finance Committee passed a two-year extension of nearly all of the expired tax breaks, whereas the House Ways and Means Committee is honing in on some of the breaks to determine their economic importance and then working to extend them permanently, creating greater certainty for businesses. While the approaches are quite different, neither offset the costs with other tax or spending provisions.
The R&E credit has been part of the tax code since 1981 and, because it has always been temporary, Congress has renewed it more than 14 times. The uncertainty created by its expiration date—most recently on Dec. 31, 2013—makes business planning difficult.
Currently, there are four separate credits. The main credit allows companies to claim a 14 percent credit for research expenses that are more than half of their three-year average, or six percent if the company had no research expenses for the past three years. The idea behind comparing a company’s research spending with previous years is to only subsidize incremental research that would not already be undertaken by the company. H.R. 4438 makes this credit permanent and increases it from 14 to 20 percent (10 percent if the company had no research expenses for the last three years).
The R&E credit floor vote is the result of a markup held last week by the House Ways and Means Committee where they considered permanently extending six tax breaks – the research and experiment credits, Section 179 expensing for small businesses, an active financing exception and look-through rules for multinational corporations, and two other tax breaks for S corporations. Votes on these other measures have not been scheduled yet. The Congressional Budget Office estimated that these six extensions would cost a combined $310.6 billion over the next decade.