Congress and the administration recognize that the current research and development tax credit is thin gruel compared with our nation’s competitors (ranking 17th out of the OECD countries). The response to this reality has been several bills recently introduced that would expand and improve the R&D tax credit.
Having left the Hill and now assisting small and medium businesses nationwide in taking the R&D tax credit, we thought it useful to highlight the top policy changes that would best encourage and support those businesses that are engaged in innovation and development — the lifeblood of a growing economy.
1. Extend the alternative minimum tax exemption for the R&D tax credit. A one-year elimination of the AMT bar to taking the R&D tax credit was included in the Small Business Jobs Act of 2010 championed by Sens. Max Baucus (D-Mont.), Chuck Grassley (R-Iowa), Mary Landrieu (D-La.) and Olympia Snowe (R-Maine) and signed into law last fall. Prior law was that a business owner couldn’t take full advantage of the R&D credit if that owner was subject to AMT. Business owners could not use the R&D tax credit to take their taxes below the tentative minimum tax amount. In practice, this meant that under the old law, four out of five small and medium businesses were severely limited or barred from taking advantage of the R&D tax credit.
The Jobs Act elimination of the AMT bar to the R&D tax credit has been a godsend for cutting-edge small and medium businesses across the country. For the first time, thousands of businesses can take the R&D tax credit. However, this extraordinarily beneficial provision was for one year only and needs to be extended.
2. Make the R&D credit available for startup companies. While elected officials love to give speeches about the R&D tax credit and its benefits for creating tomorrow’s Google or Microsoft, the sad reality is that the overwhelming majority of startups can’t take advantage of the R&D tax credit either because of the AMT bar or because for the first several years the company is not making a profit and therefore not paying tax.
The answer to making the R&D tax credit beneficial for startups is to make the credit either refundable or transferable, as proposed by Rep. Rush Holt (D-N.J.). With the reality of budget constraints, an annual limitation per company of $250,000 for a refundable credit would provide a big bang for not much buck.
The federal government is behind the states in recognizing the need to make the R&D tax credit work for startups, with Arizona, Iowa, Louisiana, Minnesota, New York and recently Virginia all providing a refundable R&D tax credit for small and medium businesses. These refundable state credits have put gas in the engines of job growth: new small businesses. It’s time to apply that lesson to the federal tax code.
3. Increase the R&D tax credit. The current credit is 20 percent. Several Members, including Reps. Donna Edwards (D-Md.) and Roscoe Bartlett (R-Md.), have proposed increasing it to 25 percent or higher. An increase to 30 percent would be of significant help to business, and consideration should be given for a higher rate: 40 percent for small businesses with less than $50 million in gross revenues.
4. Increase the alternative simplified credit. Because the tax code can never be easy, there are actually two different ways for companies to compute the credit. The ASC has been of much benefit to many companies — especially small and medium businesses — that may otherwise have difficulty qualifying for the R&D tax credit. The longtime champions of the R&D credit, Baucus and Sen. Orrin Hatch (R-Utah), have called for an increase of the ASC from 14 percent to 20 percent. Other lawmakers have similarly proposed an increase to 20 percent, including Sen. Susan Collins (R-Maine) and Rep. Kevin Brady (R-Texas). President Barack Obama in his budget asked for an increase of the ASC to 17 percent. With everyone in agreement that we need to go beyond 14 percent, hopefully this much-needed increase can get done.
5. Expand the R&D credit when manufacturing is done in the U.S. While it is vital that the U.S. maintain its lead internationally in R&D, policymakers should consider proposals that will also encourage U.S. manufacturing. Sen. Herb Kohl (D-Wis.) has proposed legislation that would increase the R&D credit from 20 percent to 30 percent for those companies that produce goods domestically. Providing an expanded R&D credit to a company with a significant percentage of domestic manufacturing will help keep manufacturing jobs in this country and foster greater R&D. In addition, such a proposal will particularly benefit small and medium-sized businesses that traditionally seek to maintain domestic manufacturing.
These are the “big five” changes that will make a real difference in encouraging research and development in this country, providing for good jobs today and a better tomorrow.
Former Rep. Jim Ramstad (R-Minn.) is senior adviser for alliantgroup. Dean Zerbe served as senior counsel and tax counsel to the Senate Finance Committee and is managing director of alliantgroup.
Vice President Joe Biden waits to conduct a mock swearing-in ceremony with Sen. Brian Schatz, D-Hawaii, in the Capitol's Old Senate Chamber, December 2, 2014. Schatz was sworn in to serve the remainder of his term since he was appointed to the seat after Sen. Daniel Inouye, D-Hawaii, passed away.