Report Stresses Economic Importance Of US R And D Tax Credit

by Mike Godfrey, Tax-News.com, Washington

09 June 2008

The potential adverse impact on the US economy of a failure to renew the Research and Development tax credit will affect small to large companies in most industries across all states, according to a new report, by Ernst & Young LLP.

Commenting on the report, entitled 'Supporting innovation and economic growth: the broad impact of the R&D credit in 2005,' and written by E&Y for the R&D Credit Coalition, Tom Neubig, the firm's National Director of Quantitative Economics and Statistics, observed that:

“The R&D tax credit has been an important factor in companies’ research and development investment decisions. The vast majority of the R&D credit, 70%, is for wages paid to workers conducting research activities in the US."

The R&D tax credit is available for qualified research and development expenditures incurred only in the United States. The credit expired most recently on 31st December, 2007, and has been extended 12 times since originally enacted into law in 1981.

Nearly 18,000 companies, including S corporations, claimed USD6.6bn of the R&D tax credit in 2005, the latest year for which data is available.

Firms in all major industries claimed the credit, with the principal industries being manufacturing, professional, scientific and technical services, and information sectors.

All sizes of companies claimed the R&D credit. 29% of the companies claiming the credit had total assets of less than USD1mn; 25% had assets ranging from USD1-USD5mn; 25% had assets ranging from USD5-USD25mn; and 21% had assets of USD25mn or more.

As a percentage of average assets, the average amount of tax credit claimed per company is a decreasing function of size. Companies with assets lower than USD500,000 claimed on average a tax credit equal to 9% of average assets, and large corporations claimed a tax credit of less than 0.05% of assets.

Companies in all states conduct industrial research and development. California reported the largest share of industrial R&D activity, followed by Michigan, New Jersey, Texas, Massachusetts and Washington.

In addition to these states, Florida, Pennsylvania, New York, Illinois, Georgia, Colorado, Ohio, Wisconsin, Alabama, Utah, Virginia, Minnesota and Oregon had over 1,000 firms conducting research and development in the state.

Several smaller states were ranked in the top 10 states in terms of R&D spending per capita: Connecticut, Delaware, Rhode Island and New Hampshire.

“This study affirms the need for Congress to quickly extend and strengthen the R&D tax credit to ensure that the US remains a leader in research and development and the highly skilled jobs that flow from an innovative economy,” argued Karen Myers (CA Inc.), Co-Chair, Government Affairs Committee, R&D Credit Coalition.

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