This recent court case favored the company claiming the R&D tax credit.
The United States was one of the first countries to enact a federal tax credit for R&D in 1981, and throughout that decade we had the most generous R&D incentive in the world. However, other countries soon realized the benefit of the R&D credit and adopted not only similar but often more lucrative credits.
By 1996, the U.S. ranked only 7th in R&D tax generosity out of the countries that had an R&D credit, and by 2004 we had slipped to 17th place. The key reason — every other country with an R&D tax credit has increased the generosity of those credits. Not only has the U.S. not increased the credit, but to date Congress has not yet extended the credit for 2010. The result – by 2009 the U.S. ranked dead last — leaving the number one position to France.
However, if Congress were to enhance the R&D tax credit and make it permanent as other countries have done instead of simply extending it each year, the result would be an immediate and positive impact on U.S. innovation and job creation.
For example, a study by the Information Technology and Innovation Foundation think tank suggests that raising the Alternative Simplified (ASC) R&D tax credit rate from 14 to 20 percent would create 162,000 jobs in the short-term and an unspecified number of additional jobs in the longer-term. ITIF also estimates that raising the ASC would increase the annual GDP by $90 billion, the number of patents issued by 3,850 and federal tax revenues by $17 billion.
Raising the ASC to 20 percent would bump the U.S. R&D tax generosity rank to number 10. However, we would need to increase the ASC to 31 percent to move to 5th place and to a whopping 47 percent in order to reclaim the number one spot with the most generous R&D credit of the 21 countries that currently offer one.
Fortunately for American businesses, all but about 12 states offer a state R&D credit. Some of these state credits are more lucrative than the federal credit, and some are even fully refundable.
For example, New York has a refundable credit, specifically for companies with revenues under $10 million, that averages between 9-18%. Starting in tax year 2010, the Minnesota state credit will be expanded and made refundable. Louisiana has one of the most lucrative credits of all the states. Depending on the size of the company, the credit can be from 8 to 40 percent, and it is also refundable.
Companies located in states that offer a state R&D credit can realize significant dollars in tax credits, especially when combined with the federal credit. These dollars can be reinvested to fund additional R&D which, in turn, will boost both innovation and job creation in the U.S.
Last month, Minnesota Governor Tim Pawlenty signed into law a jobs bill that includes enhancements to the state’s Research and Development tax credit.
The bill expanded Minnesota’s R&D tax credit, making it more attractive for small to large-sized companies that conduct R&D activities in the state.
Major changes to the MN R&D Credit:
1. Effective for taxable years beginning after December 31, 2009, partners in a partnership and shareholders in an S corporation may now take the R&D credit. Previously, only C corporations could take the credit.
2. The tax credit increased and now equals 10 percent of the first $2 million of excess qualified research expenses for the taxable year over the base amount. For excess expenses over $2 million, the credit equals 2.5 percent.
3. The credit for taxable years beginning after December 31, 2009, is now refundable.
All pass-through entities should seek to take advantage of the Minnesota R&D in 2010.
In addition, all companies that have had losses for several years, and have never taken the state credit, should take advantage of the credit in 2010 to obtain a refund.
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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Tax law changes during 2007 and 2008 have increased the complexity of preparing tax returns, creating both challenges and opportunities. President George W. Bush signed into law on Oct. 3, 2008, a package of three bills: Emergency Economic Stabilization Act of 2008, the Energy Improvement and Extension Act of 2008, and the Tax Extenders and Alternative Minimum Tax Relief Act of 2008.
Take time now, before year-end, to review your 2008 tax situation and consider tax-saving strategies that you still have time to implement. Don’t wait until it’s too late to reduce your 2008 tax bill. You can reach the tax professionals at SourceCorp at: www.SourceCorpTax.com.
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Since 1983, SourceCorp has provided IRS-approved tax strategies and services to clients resulting in maximized tax deductions, increased cash flow, minimized tax payments and increased ROI. For more than 25 years, we have worked closely with CPAs, manufacturers, wholesalers, distributors, building owners, architects, engineers and auto dealerships to help them pay less tax and save more money. As a result, funds are available for reinvestment or to meet other current needs. Owned by Apollo Management, Inc., a New York-based private equity firm, SourceCorp is the nation’s leading provider of specialized tax services including LIFO Accounting, R&D Tax Credit Studies, Cost Segregation Studies, and Energy Efficient ‘Green’ Building Tax Deduction Services.
On Oct. 3, the House voted 263-171 to pass an amended Emergency Economic Stabilization Act after rejecting the bill earlier. President George Bush signed the $700 billion bailout plan later that day.
The bill included a two-year extension of the R&D tax credit, which expired at the end of 2007. The tax credit covers up to 20 percent of qualified R&D spending.
Current legislation has revolutionized Research & Development credits allowing more businesses and their activities opportunity to take advantage of these benefits than ever before. Read More →
This past week, President Bush signed into law H.R. 1424. After months of negotiations, Democrats, Republicans and the White House came together to pass an increase and extension of the R&D Tax Credit as part of the Emergency Economic Stabilization Act of 2008.
Research and Development Tax Credit
The R&D tax credit was extended for two years through December 31, 2009. The federal R&D Credit continues to provide companies an opportunity to claim an income tax credit for activities centered on the development or improvement of products, processes, software, techniques or formulas. This credit generates significant tax savings for US companies in the manufacturing, technology, software, engineering, and aerospace/defense industries.
If you are involved in developing new products/processes, improving existing products, creating more reliable products, developing prototypes, design tools/jigs/molds/dies, apply for patents, testing new concepts, investment in manufacturing process activity, developing new technology or employ outside consultants and/or contractors to do any of these activities, you may qualify for the R&D Tax Credit.
About SourceCorp Professional Services
Celebrating our 25th year in business, SourceCorp Professional Services is the leading provider of R&D Tax Credit Studies, Energy Efficient Commercial Building Tax Deductions, Cost Segregation Studies, and LIFO Accounting in the U.S. SourceCorp serves many of the nation’s most prominent CPA firms, Associations, and Fortune 1000 companies.
SourceCorp announces the extension of the Energy Efficient “Green” Building Tax Deduction and the two-year extension of the R&D Tax Credit. Today, Congress approved an unprecedented $700 billion government bailout and sent it to President Bush who quickly signed it.
Energy Efficient Commercial Building Tax Deduction Read More →
The Senate voted 74-25 on Wednesday for a $700 billion rescue of the nation’s banking system – loaded with $150 billion in tax breaks – and sent it back to the House for a second chance on Friday.
Some senators predicted that the House will approve the bill easily on Friday after the political kickstart from the upper body.
The added tax breaks include a one-year fix of the alternative minimum tax to shield millions of upper-middle-income taxpayers from a big tax increase; tax breaks for wind, solar and other alternative energy projects; and an extension of the research and development tax credit for businesses. The energy and research tax breaks have been pushed heavily by Silicon Valley companies that see alternative energy as the next technological frontier. Read More →
After repeated failures to pass similar legislation, the U.S. Senate voted Tuesday to extend the investment tax credits for solar and other renewable energy sources as well as renew the R&D tax credit for another year, the Associated Press reports. The $17 billion renewable credits package (known as the “Energy Improvement and Extension Act of 2008,” an amendment to HR 6049) is part of a major tax relief bill approved in a 93-2 vote. The House could take up its version today. The House bill diverges from the Senate in that it fully pays for the business and individual tax breaks by eliminating some tax breaks for hedge fund managers and for firms doing business overseas. Read More →