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.
The administration and Congress have proposed increasing the R&D tax credit as well as the alternative simplified credit (as the name implies, the ASC is a valuable alternative way for companies to calculate the credit).
Increasing the credit is certainly a good idea — the U.S. R&D tax credit is pretty thin soup compared with our international competitors.
An increase of the credit from the current rate to 20 percent to 25 percent and a higher rate for small businesses would be a good start.
The proposal of Sens. Max Baucus (D-Mont.) and Orrin Hatch (R-Utah) and Rep. Kevin Brady (R-Texas) to increase the ASC from 14 percent to 20 percent is also much-needed.
If there is concern about the costs of expanding the R&D tax credit, policymakers may want to target the increased credit to those companies that perform their R&D in this country and also manufacture here. A carrot may be better than a stick to encourage companies to keep jobs in this country.
However, the administration doesn’t need to wait for Congress — it can take steps on its own to make the R&D tax credit more effective.
Inexplicably, the Treasury Department recently decided by regulation to keep in place a nonsensical rule that prevents a business from claiming the ASC on an amended return (the business can take the regular R&D tax credit on an amended return — but often they don’t qualify under the regular R&D tax credit or don’t receive nearly as strong an incentive as they would under the ASC).
This Treasury regulation (first put forward as a proposed regulation when the law was signed under the previous administration) has meant that thousands of small and medium businesses are prevented from taking full advantage of the R&D tax credit and has effectively cost the economy thousands of jobs. Not the help we need.The Government Accountability Office wisely recommended in a recent report on the R&D tax credit that companies should be allowed to take the ASC on an amended return.
The White House should have Treasury change this job-killing regulation immediately — and if not, Congress should make it clear that ASC can be made on an amended return.
For 30 years the R&D tax credit has served the economy well. With some improvements and a good tune-up, it will help our economy and create jobs tomorrow and for another 30 years.
Dean Zerbe is national managing director of alliantgroup in Washington, D.C., and former senior counsel and tax counsel for the Senate Finance Committee.