The Future of the R&D tax credit | Tax Point Advisors

Posted by Jeffrey Feingold on 01.24.14

The federal tax credit for Research and Development will expire at the end of December 2013, but two proposals have been made in the House during December to make the tax credit permanent and to raise the value of the credit. Both Rep. Scott Peters, D-Calif. and Rep. Julie Brownley, D- Calif. have proposed bills to make the tax credit permanent and raise the value of the credit. They differ in the amount of the increase however. Brownley's bill would raise the tax credit to 50% while Peters' bill would raise it from 14% to 20%.

Tax Point Advisors say that this is indeed good news for American businesses. If either bill passes, not only is the government showing its commitment to our businesses with a permanent tax incentive to develop new products and processes, but also reducing taxes for these businesses which can give them the much needed cash to update machinery or hire additional employees. With this commitment to the tax credit, more businesses will claim it without fear of an audit. Lowering the taxes to American businesses encourages economic growth, high quality job creation, large ticket item purchases, and new product development to keep American technologically savvy.

Currently, the R&D tax credit is a bottom line, dollar for dollar reduction of taxes, not a tax deduction. It applies to not only those working in laboratories developing new products, but also to those designing new methods on the work site or the shop floor. New processes do not have to be new to the industry - only new to the business implementing them. This encourages businesses to bring their methods up to date as well as to invent new products.

Peters said in his statement that the Information Technology and Innovation Foundation estimates that raising the Alternative Simplified Credit would create more than 150,000 jobs and increase GDP by $66 billion. These jobs should be high paying tech jobs that will help the economy to recover.

Peters' bill promotes collaborative research by lowering the barriers. It encourages energy research as well as biotechnology research consortia. California has unique partnerships between academia, industry, and private research that serve as an example for the whole country to use to increase innovation and improve U.S. competitiveness.

The federal tax credit has never been a permanent part of our tax code, although it has been extended a dozen times since it was initially introduced in 1981. The most recent extension came last January when President Barack Obama extended the credit through 2013 as part of the fiscal cliff deal reached then.

Other legislators have tried in the past to make the tax code permanent without success. The Obama administration has criticized the temporary nature of this tax credit saying that it is ineffective by being temporary because businesses cannot do long range planning based on the availability of the money from this credit when they don't know if the credit will be there or not.

Both bills have been referred to the U.S. House Committee on Ways and Means for further study.


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