The research and development tax credit has made more comebacks than sitcom stars of the 1970s. And it’s about to happen again.
The research credit expired on December 31, 2007, but the Senate Finance Committee pushed through proposed legislation on Tuesday to extend the tax break for the 13th time since it was enacted in 1981. (Congress allowed the credit to lapse completely only once — between 1995 and 1996.)
The proposal is a substitute amendment to H.R. 6049, the Renewable Energy and Jobs Creation Act of 2008, a piece of legislation that also proposes alternative energy solutions and other tax relief for consumers and businesses. The provision is the government’s way of spurring innovation among U.S. companies, giving tax breaks for increasing investment in R&D.
If the proposal survives a vote in its current form, the credit will be retroactive for expenses paid or incurred after December 31, 2007, but it will expire — once again — at the end of 2008. “Nobody wants to commit to the fiscal impact [of the tax credit] every year,” comments Michael Silvio, a director at CBIZ Accounting and Tax Advisory Services, who counsels companies on how to take advantage of the credit. “This pay-as-you-go approach always needs an offset.”
The estimated cost of the proposal is nearly $10 billion over 10 years. The Senate Finance Committee wants to fund the credit by delaying a planned tax benefit that would give multinational corporations additional tax deductions in the United States, noted a statement released by Montana Democrat Senator Max Baucus, the committee chair. The committee also is looking to require hedge fund managers to report and pay taxes on their compensation as they receive it, instead of stashing the funds in offshore accounts to avoid a tax hit.
Despite a dip in participation during the 2001 to 2003 time frame, which is explained by the economic recession during those years, there has been a steady climb in the number of companies that use the credit, as well as a rise in the dollar amount claimed. In 2005, the most recent year for which data is available from the IRS, more than 17,700 public and private companies claimed research tax credits for a total of $6.6 billion in tax breaks, according to a report released in April by the R&D Credit Coalition, an advocacy group. That represents a 6 percent increase in the number of companies claiming credits, and a 50 percent rise in the total dollar amount, for the eight years covered by the study — 1997 through 2005.
Of the companies claiming R&D credits in 2005, 79 percent were defined as small, having under $25 million in total assets. However, the lion’s share (62 percent) of the credits in terms of dollar amount was gobbled up by large companies, defined as having $2.5 billion or more in total assets. That makes sense, because the credit is calculated on, among other things, increases in R&D spending. So, companies that continually innovate, and spend large sums year after year to do so, garner a tax break on the additional spending.