The first step toward increasing U.S. competitiveness around the world is making credit permanent. If it were made permanent, companies could accurately budget for future R&D spend, giving CFOs the certainty of receiving the credit and the ability to determine proactively how to spend the saved tax dollars. Congress can’t agree on much these days, but making the credit permanent is one thing that does have bipartisan support.
Many companies use their R&D credit savings to hire additional R&D personnel, invest in new equipment and technology, engage in innovative marketing and provide employee incentives. For example, a small technology company based in Atlanta filled a critical new position in 2012 based on the $92,000 that it saved by using the federal and Georgia’s state R&D Tax Credits. As a result of filling this high-paying, yet scarce, position, the company was able to get its product to market faster and recognize revenue ahead of schedule.
Secondly, Congress should eliminate the Alternative Minimum Tax (AMT) restrictions. The R&D Tax Credit is currently limited by AMT for C-corporations at the corporate level and for flow-through companies like partnerships and S-corporations at the individual level. If a company or individual is subject to the AMT, they cannot benefit from the R&D Tax Credit they might qualify for in the current tax year. By eliminating the AMT constraint, companies and individuals who consistently find themselves in AMT year after year would actually be able to benefit from the R&D credit.
Next, Congress should increase the percentage of the R&D Tax Credit. A greater monetary benefit may attract more companies to the U.S. and encourage more companies to keep their R&D onshore. At present, the Alternative Simplified Credit (“ASC”) calculation is equal to 14 percent of the amount of the current-year Qualified Research Expenditures (QREs) that exceed 50 percent of the average QREs for the three preceding taxable years. Current legislation hopes to increase this to 17 percent, thereby improving the tax-savings benefit.
Let’s say a global pharmaceutical manufacturer increases R&D spend about 10 percent each year. In 2013, it spent $2 billion developing, testing and manufacturing new and improved products and enhancing production efficiencies. Under the ASC method of calculation, this pharmaceutical manufacturer’s credit would be $108,017,000. By increasing the percentage to 17 percent, its R&D credit comes out to $131,163,500, a substantial increase.
Finally, the government should abolish the “traditional” method of calculation. Companies can calculate the R&D Tax Credit in two ways. The traditional method is antiquated, complicated and relies on data from the 1980s. The main issue is that information that is culled from 30 year-old-data often isn’t defendable or even available. By contrast, the ASC calculation relies on base-period data from the past three years and is much simpler to calculate and substantiate. Many companies are only able to use the ASC calculation because they no longer have the necessary data physically available to support the traditional calculation.