A bipartisan group of Senate Finance Committee members have introduced legislation to streamline and make permanent the signature tax credit for companies’ research expenses that is set to expire December 31.
The bill would merge two existing options, sunsetting the traditional research and development credit after 2010 and permanently boosting the “alternative simplified credit” from 14 percent to 20 percent. The aim is to provide a more robust and flexible credit for newer and start-up firms, particularly in the technology sector. At the same time, it would end the stop-start nature of the existing credit — which has been extended 13 times — providing certainty for companies while letting older, established firms gradually adjust to the alternative credit.
The traditional credit applies to qualified research expenses above a certain amount. The amount depends on whether the company is considered established — with gross receipts and research expenses in three or more tax years from 1984 to 1988 — or a start-up firm, which had fewer than three tax years in that period. But the base amount must exceed 50 percent of a firm’s qualified research expenses in a tax year.
The alternative credit was added to the tax code in 2006, allowing firms to claim a credit for 12 percent of qualified research expenses above 50 percent of its average over the previous three tax years. The credit was boosted to 14 percent for 2009 as part of the financial industry rescue package in the fall. Hatch touted the simplified credit as a “more direct incentive to innovation-oriented companies” in the high-tech sector, such as biotech and software.
A similar bill was introduced earlier this year in the House, with more than half of the House tax-writing panel’s members co-sponsoring the bill.
Earlier this year, a coalition of firms, including Microsoft, Boeing, Dow Chemical and CA wrote in support for the bill. Some companies prefer the traditional credit, however, more and more have migrated to the alternate credit and those that have not made the switch will have time to adjust and benefit from the boost to 20 percent.
Currently companies can choose between the two methods and some firms that benefited from the traditional structure may lose out under the plan. The Senate proposal would allow companies to use the traditional credit for 2009 and 2010. Afterward, it would expire.
The traditional credit is generally based on the increase in research spending at a company in relation to a base period of 1984 through 1988. The alternative simplified credit rewards companies for increasing research spending above a base level determined by spending in the previous taxable years. The new proposal would increase the rate on the alternative credit from 14 percent to 20 percent.
The Obama administration has proposed making the credit permanent, but in its current form rather than merging the components, at an estimated $74.5 billion cost. The White House would pay for the extension through a series of tax changes targeting multinational firms’ overseas profits, which the business community has launched a massive lobbying effort to kill.
If your company is looking for a smart way to increase cash flow, you owe it to yourself to learn more about the R&D Tax Credit.
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