The research and development tax credit celebrates its 30th anniversary this month. While the credit has been a success, with the economy struggling and new jobs at a standstill, there is much that can be done to make this 30-year-old run even better.
Looking backward, the R&D tax credit has provided real benefit to companies across the board that are seeking to grow and remain competitive.
Looking forward, there is much that lawmakers and the administration can do to make the R&D credit more effective in helping the economy and creating jobs, particularly for small and medium businesses that vastly underutilize the credit. Happily, these improvements are not that costly but will make a big difference in creating new jobs.
The first step for Congress is the easiest — do something you just did. The Small Business Jobs Act signed into law in September 2010 included bipartisan tax legislation that for one year — 2010 — repealed the alternative minimum tax bar for small and medium businesses taking the R&D tax credit. Previously, if you were an owner of a business that was a pass-through entity (an S corporation or LLC partnership — 93 percent of all companies in this country are organized as a pass-through entity) and were subject to the AMT, you couldn’t use the R&D tax credit to lower your AMT.
Repealing the AMT bar sounds minor but an average of 80 percent of small and medium businesses that would otherwise qualify for the R&D tax credit can’t use the credit because of the AMT.
The one-year AMT turnoff has made a huge difference for small and medium businesses — at times the difference between keeping doors open or not.
Congress needs to extend this one-year provision and make the AMT turnoff permanent for R&D (it’s Section 38(c)(5) of the code for tax geeks). The Joint Committee on Taxation has estimated that this will cost less than $200 million.
Next, is to make the R&D credit eligible for startup companies. It is small and medium businesses that are the engines for jobs growth in this economy, especially new small and medium businesses. Often it is these new businesses that are engaged in some of the most cutting-edge R&D. However, these new businesses, doing some of the best R&D, are usually not eligible for the credit because they are not making a profit.
Several states have changed their laws and now allow for a state R&D tax credit that is refundable. Louisiana and Minnesota in particular have a strong R&D credit available for new businesses. This expanded R&D credit has done much to attract new businesses and jobs, encourage businesses to relocate to the state and help keep businesses and jobs in place.
The administration’s drumming for a payroll tax holiday has mostly fallen on deaf ears in Congress. A major factor of concern over continuing the payroll holiday is cost (more than $110 billion).
Instead, consideration should be given for a payroll holiday that is much narrower and targeted — limited to new businesses and small businesses and based on the amount of qualified research expenditures. To limit costs, the tax relief could be capped. Such a tax incentive would be a lifeline for new and small businesses and would encourage entrepreneurs to start a new business.
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