Businesses often take a risk in the development of new products and processes.
The Research & Experimentation Tax Credit, first enacted in 1981, was intended to encourage companies to engage in research and development by at least partially subsidizing the expenses involved. The credit originally was set to expire in 1985, and has been extended 14 times since then. The credit expired again on Dec. 31, 2013, leaving open the question as to whether it will, in fact, be extended once again.
“It’s always a possibility that it won’t be reinstated,” said Mel Schwarz, partner in the Washington National Tax Office of Grant Thornton LLP. “Until they actually do it there is the possibility that they won’t, and that’s the reason we can’t take it into account for financial accounting until the legislation is actually enacted.”
However, Schwarz predicts it will be reinstated by year’s end.
“I think it will be back in by the end of 2014. The question is, when in 2014 will it be put back in? We certainly need to be prepared for it to be no earlier than spring, and it could well fall later in the year,” he said.
“At the moment Congress is wholly focused on other things. Also, there is still a desire on the part of Ways and Means Chairman Camp to make an additional effort to move tax reform forward. If that is the case, either the extenders become part of that [tax reform] process, or Congress will at least delay the extenders until the process works out.”
Meanwhile, Schwarz urged Congress to consider not merely extending the R&D Credit, but expanding it in order to make the United States more competitive with its Organization for Economic Cooperation and Development trading partners. The OECD countries have research and development incentives that are frequently more beneficial than those available in the United States, Schwarz indicated.
He cited a study by Grant Thornton and Tech America that proposes making the research credit permanent; making a portion of the credit refundable for small startup ventures; and increasing the size of the credit.
The inability to forecast the credit is detrimental to business, according to the study. The recent trend of retroactively reauthorizing the credit is especially detrimental. Because businesses cannot count on the R&D Tax Credit on a year-to-year basis, investment in R&D suffers.
“In the coming year, our nation’s political leaders should seize the opportunity to expand incentives for innovation and research as they contemplate comprehensive tax reform,” Schwarz said.
“If you consider the largest-dollar tax benefit provisions on the business side, research incentives are probably third, right after accelerated depreciation and the Section 199 domestic activities production deduction,” Schwarz noted. “What we show in the study is that the OECD countries not only have a lower tax rate, but they also have research incentives, some of which are more generous than the research credit available in the U.S. If the goal is to try and make our system more competitive with the worldwide system it makes no sense to eliminate things like research incentives which are equally part of the incentives provided by the rest of the countries.”
Currently the credit only helps those that have a tax liability, Schwarz observed. “A refundable credit would be beneficial not only to established companies but also to startup and research-intensive businesses that have yet to make a profit,” he said.
“The credit is not a present incentive for you until it becomes profitable. There are a lot of high-tech companies that are in startup mode. They will ultimately generate a very important product, but at the moment they’re spending more than they are taking in, so they don’t get any benefit from a nonrefundable credit.”
Some foreign jurisdictions allow the credit to be used to offset a portion of the employment tax, Schwarz noted. “That would give not only the incentive to do research but also ties in with the ongoing provision of employment, which is another good policy goal.”