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R&D Tax Credit — Smart Reform Ideas From Congress

While Congress continues to sharpen pencils on tax reform, key lawmakers are putting forward good ideas for improving the most important tax incentive for improving productivity and creating jobs – the Research and Development (R&D) Tax Credit. I anticipate these proposals will be considered in the next major tax bill.

The most intriguing of the new ideas is a bipartisan proposal from Senators Coons (D-DE) and Roberts (R-KS) that would encourage companies to do R&D in this country and also manufacture in this country. Too often, we see companies do R&D in this country only to have much of the manufacturing done overseas. Encouraging colocation of R&D and manufacturing will provide tangible benefits to the economy – especially given that studies have found that colocation can significantly improve productivity. A key part of the R&D tax credit is supporting not just basic science but also applied science – having an impact on the production line and the manufacturing process.

The Senators’ bill would provide a phased-in increase in the R&D tax credit by up to 25% for companies that perform the majority of their manufacturing in the U.S. A bill that encourages research and manufacturing in this country –? — the best combination since shrimp and grits. From the perspective of the work of my company, alliantgroup, in the R&D tax credit – we see that this proposal will especially help small and medium companies throughout the country. The Senators are leaders in the R&D tax credit and have previously championed important reforms and changes to the R&D tax credit that have been signed into law. I expect this commonsense idea to get a strong look.

The second proposal is another bipartisan bill – this from Congressman Tiberi (R-OH) – a senior member of the House Ways and Means Committee – and Congressman Larson (D-CT) – Chair of the House Democratic Caucus — that I give high marks to for seeking to address some of the more “weedy” – but important — issues and problems in the R&D tax credit.

Highlights include:

Increasing the Alternative Simplified Credit (ASC) from 14% to 20% — the same as the regular R&D tax credit. In addition, the proposal would help new firms by allowing the credit to be equal to 10% (up from 6%) of the taxpayer’s qualified research expenses for the year.

Allow Election of Reduced Credit On Amended Return – this is under Section 280C of the tax code – and is a real grind especially for small and medium businesses who are seeking to take the R&D tax credit for the first time. The Congressmen are proposing to allow taxpayers to elect to take a reduced R&D tax credit and a full deduction for allowable research expenses on both an original tax return and an amended return. Let the bells ring. An important fix.

Senior Employees Wages Included in Research Expenses. Again – a tangible benefit for many small and medium businesses where often the founder of the company is also the top researcher. While current law does roughly provide for this – the IRS sometimes doesn’t go quietly in the night – and underscoring that upper-level employees can qualify for research expenditures would be a good help.

The bill overall provides a number of good changes and reforms that especially will help small and medium businesses – businesses that have traditionally underutilized the R&D tax credit. The PATH Act last year eliminated probably the biggest hurdle for small and medium businesses taking the R&D tax credit — the AMT bar – and we are already seeing the positive impact of that change with thousands of small and medium businesses utilizing the R&D tax credit for the first time. The problem remains, in part, one of education – we still see an extraordinary number of small and medium businesses that self-censor who do not understand the wide range of industries that benefit from the R&D tax credit (manufacturing, computer software, architecture, engineering, agriculture, food production, etc.) and do not think they qualify for the R&D tax credit – time to think again.

These changes being put forward by Senators and Congressmen will do much to build on the success of the AMT turnoff and help encourage manufacturing in this country. For a White House looking for success – especially in helping keep and grow manufacturing jobs in this country – this is a package of bipartisan/bicameral reforms; targeted to help encourage research and manufacturing in this country; and, not too expensive — that fits the bill.

About the Author

Dean Zerbe is alliantgroup’s National Managing Director based in the firm’s Washington, D.C. office. Prior to joining alliantgroup, Zerbe was Senior Counsel and Tax Counsel to the U.S. Senate Committee on Finance. He worked closely with then-Chairman of the Finance Committee, Senator Charles Grassley, on tax legislation. During his tenure on the Finance Committee, Zerbe was intimately involved with nearly every major piece of tax legislation that was signed into law, including the 2001 and 2003 tax reconciliation bills, the JOBS bill in 2004 (corporate tax reform) and the Pension Protection Act.