A report from Ernst & Young describes the potential adverse impact on the U.S. economy if the research and development tax credit is not renewed.

The report, prepared by E&Y for a lobbying group, the R&D Credit Coalition, argues that failure to renew the R&D tax credit would affect both small and large companies in most industries across all 50 states. The credit has been extended a dozen times since it was first enacted in 1981 and most recently expired, for the 13th time, on Dec. 31, 2007.

"Companies are faced with a situation where the credit is not in place, yet they're coming up with all the credits and potentially doing it all for naught if the credit does not get extended," said Anthony Mondoro, director of Ernst & Young's National Research Credit Practice.

Bills are pending in Congress to renew the credit. The House recently passed a bill, H.R. 6049, which included a provision for extending the R&D credit, along with other recently expired credits (see House Passes Bill with Taxpayer Relief).

Senate Finance Committee leaders introduced a bill in April, S. 2886, the "Alternative Minimum Tax and Extenders Tax Relief Act of 2008," which includes a two-year extension of the R&D tax credit through the end of 2009 and strengthens the credit by phasing in over two years an increase in the new credit formula rate to 14 percent in 2008 and 16 percent in 2009. The Senate bill may come up for debate this month.

According to the report, 17,700 companies, including S corporations, claimed $6.6 billion in R&D tax credits in 2005, the latest year for which data is available. Firms in all major industries claimed the credit. Companies with assets lower than $500,000 claimed on average a tax credit equal to 9 percent of average assets, while large corporations claimed a tax credit of less than 0.05 percent of assets.