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Business Jobs Act signed into law in September 2010 included bipartisan tax legislation that for one year — 2010 — repealed the alternative minimum tax bar for small and medium businesses taking the R&D tax credit.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.
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.
Rep. Elijah Cummings, D-Md., right, hugs Harold Schaitberger, General President of the International Association of Fire Fighters, after the Congressman spoke at the IAFF's Legislative Conference General Session at the Hyatt Regency on Capitol Hill, March 9, 2015. The day featured addresses by members of Congress and Vice President Joe Biden.