Corporate America Urges Action On Research Tax Credit

by Mike Godfrey, Tax-News.com, Washington

26 October 2009

Hundreds of companies and business organizations from across the United States are urging Congress to approve legislation to strengthen and make permanent the research and development (R&D) tax credit before it expires on December 31, 2009.

First enacted in 1981, the R&D provision is composed of two credits – a traditional credit and the alternative simplified credit – both of which provide US firms a tax credit for incremental qualifying research expenses, such as labor and equipment costs. However, Congress in its wisdom failed to make the provision permanent, meaning that the credit needs to be extended regularly. This usually happens on an annual basis, but on occasions the credit has been extended retrospectively after the previous legislative patch has expired. As the corporate lobby points out, this situation makes it difficult for businesses to plan their future investments in R&D.

In a letter sent to every member of Congress and signed by more than 400 companies, the R&D Credit Coalition, a group of more than 100 trade and professional associations and businesses of varying size, warn that failure to enact a permanent and strengthened credit will have "significant negative consequences for the US economy" and could cause the plug to be pulled on investment in important areas of research such as renewable energy and energy efficiency technologies.

"The R&D tax credit encourages businesses of all sizes to undertake cutting-edge research projects in the United States," the letter, dated October 20, states. "R&D is the very lifeblood of our knowledge economy. At a time when the American economy is weak, research and development across industry sectors makes it possible to create and maintain good, high-paying jobs at home and sharpens the ability of companies to compete in the global marketplace."

"Businesses need certainty to make long-term, high risk investments in the US. Furthermore, a strengthened credit will be more competitive with incentives provided by other countries that are vying for research investment dollars," the letter adds.

The coalition laments the fact that Congress has stood by and watched the US R&D credit reduce in competitiveness relative to similar research incentives since introduced in other countries. "When the R&D Credit was first created, the US had the distinction of providing the most generous tax treatment for research among all OECD nations," the coalition says. "Today, that is not the case because the credit has been whittled away over the years due to our global competitors such as Canada, China, Japan and others that offer more aggressive R&D incentives. In fact, the US has fallen out of the top 10 globally when measuring government incentives for private sector R&D and now measures 17th."

A permanent extension to the R&D tax credit is supported by President Obama, who has said that the credit returns two dollars for every dollar spent and should "no longer fall prey to the whims of politics and partisanship."

The companies that signed the letter want Congress to approve legislation for a permanent and strengthened R&D credit as proposed in bills introduced into the House of Representatives by Reps. Kendrick Meek and Kevin Brady, and into the Senate by Sens. Max Baucus and Orin Hatch.

In summary, the new proposals would allow the traditional credit to expire in 2010 and increase the alternative simplified credit, which is currently set at 14% of qualifying expenses, to 20% and, importantly, make the simplified credit permanent. Companies would be given the option to claim the credit under current law in 2009 and 2010 in order to have time to adjust their accounting and effectively shift to the new, improved credit.

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