Editors Note: Amalie L. Tuffin is a member of the Research Triangle Park law firm of Daniels Daniels & Verdonik, P.A.
_______________________________________________________________________________________The research and development (R&D) tax credit is a federal tax credit that partially offsets research and development costs incurred by companies conducting qualified research. The credit is available for certain “qualified research” expenses; the definition of “qualified research” contains many qualifications and exceptions.
However, at the root of the definition is the concept of expenses incurred pursuing discoveries that are technological in nature and intended to be used in the development or improvement of a product. In addition, to be eligible for the credit, the expenses must relate to research conducted within the United States.
The credit is available for a percentage of such costs to the extent the costs exceed a floor amount that is related to the taxpayer’s prior R&D expenditures. The R&D credit was originally enacted as a temporary measure back in 1981, at the instigation of President Reagan. The credit has since been extended 11 times, but has never been made permanent.
The current extension of the credit, enacted as part of the Working Families Tax Relief Act in October 2004, is currently set to expire as of December 31.
R&D Credit Is Important for Tech Firms, the Economy
The availability of the R&D credit is of critical importance to technology companies and other developers of innovative products, and is also important to the U.S. economy as a whole. As noted above, the credit is available only with respect to expenses incurred for research conducted in the United States. Accordingly, the credit encourages companies pursuing research into innovation and discovery to both pursue the research in the first place, and to pursue the research here in the United States. This increases employment in the United States, enhances our technological base and helps foster the culture of technological innovation that has enabled the U.S. economy to flourish over the years.
Both the Senate and the House have adopted bills that would extend and expand the R&D credit. The Senate adopted the Tax Relief Act of 2005 on November 18; the bill number for this bill is S. 2020. The Senate bill extends the R&D credit for one year, until December 31, 2006. It also increases the amount of the credit by approximately thirty percent; the current level of the credit is estimated to cost $7 billion in tax revenue and the credit, as expanded is estimated to cost $9.9 billion in tax revenue. The House adopted the Tax Relief Extension Act of 2005 on December 8, 2005; the bill number for this bill is H.R. 4297. It contains the same provisions as the Senate bill.
Further Legislative Action Is Required
In order for the extension and expansion of the R&D credit to become law, the House and Senate must reconcile the provisions of their two tax relief bills (the bills contain identical provisions insofar as the R&D credit is concerned, but there are many other provisions in the two bills, some of which require negotiation between the House and the Senate before being included in a final agreed-upon bill). Each of the House and Senate must then adopt the joint bill so that it can be presented to President Bush for his signature.
As a result of the overall goal currently set by the House and Senate that the total tax “cost” (i.e., total lost tax revenue) of the joint bill not to exceed $70 billion, and the fact that the provisions of the current House and Senate bills when taken together significantly exceed that goal, it is possible that, as part of this negotiation process, the extension will not occur and the credit will end.
More likely, the credit will be extended but there will be no expansion of it. While it is possible for Congress to extend or expand the credit retroactively, formal financial plans, product cost forecasts and the like cannot reliably incorporate the credit for tax years after 2005 until Congress acts, and the lapse of the credit could thus affect spending plans.
Many business associations are pushing hard for the provisions extending and expanding the R&D credit to be adopted by the end of the year. The R&D Credit Coalition, which is made up of representatives from more than a thousand private employers, including such companies as Microsoft, Boeing, United Technologies Corporation, as well as of more than 85 trade and professional associations, such as the National Association of Manufacturers (see www.investinamericasfuture.org) is taking a leading roll.
The North Carolina Technology Association has sent a formal letter to our Congressional Leaders urging the extension.
Readers interested in doing the same should contact their respective Senators and Representatives as well as get involved with trade associations that are actively lobbying for the credit to be extended and expanded.
Daniels Daniels & Verdonik, P.A. has been serving the legal needs of entrepreneurial and high technology clients for more than 20 years. Amalie L. Tuffin concentrates her practice in the representation of entrepreneurial and technology-based businesses, focusing on corporate, taxation and securities matters. Questions or comments can be sent to email@example.com