Tax Incentives - September 2011

Permanent R&D Tax Credit
Obama’s Proposal

Last week, President Obama unveiled his proposal to expand, simplify and make permanent the research and development tax credit. It seems each President makes a proposal to make the R&D tax credit permanent but is typically unable to get it across the finish line with Congress. Let’s hope President Obama is able to accomplish this goal.

The current R&D tax credit was enacted as a temporary credit under the Reagan administration and has been extended 13 times since it was created. However, much like the Alternative Minimum Tax (please don’t get me started on this one….), the structure and application of the R&D tax credit have not kept pace with today’s economy. Companies opting to take a research tax credit must 

President Obama would increase the ASC rate to 17% and make the research and development tax credit permanent simplifying the filing for businesses as well as providing certainty in terms of budgeting and focusing on R&D.

evaluate both the archaic regular credit formula that would provide a net benefit of approximately 6.5% (while the statutory language would lead you to believe it’s a 20 percent tax credit, limitations and structure make it a much lower actual benefit) and the Alternative Simplified Credit (or ASC method) that generates a varying return depending upon a company’s research expenses and marginal tax rate (in the statutes, this method uses 14% but again, due to limitations and structure, the actual benefit is lower).

President Obama would increase the ASC rate to 17% and make the research and development tax credit permanent simplifying the filing for businesses as well as providing certainty in terms of budgeting and focusing on R&D.

Let’s look at a few of the areas where both sides of the political aisle seem to agree as well as where they do not as it relates to this critical tax incentive:

Good for America – Both Republicans and Democrats agree that keeping innovation and thought leadership in the United States is critical to our survival and growth in a global economy.

Innovation Creates Jobs – When new technologies, new methodologies or other innovations happen, high skilled jobs are created. All believe that high-skilled jobs should be based in the US and our government should help keep those jobs here.

Ripple Effect – Typically, when a new technology is introduced into the marketplace, new jobs are created to bring that technology to market. Additionally, competing and ancillary products are developed (the examples are numerous but the iPhone and iPad come to mind immediately). This “ripple effect” of new innovation spurs new jobs where there were none. All agree we want those ripples emanating and remaining in the US driving job growth here.

Paying the Bill – Not a big surprise that democrats and republicans can’t agree on how to “pay for” making the research tax credit permanent. Am I the only one that thinks it’s interesting that a tax incentive that is designed to drive new job growth (and thereby generate new tax revenues) would need to be paid for?

Finger pointing rather than focusing on constituents - In President Obama’s proposal, he notes that the “…although Republicans have supported extension in the past, they have voted against it multiple times this year …” I have yet to see a singular proposal where the R&D tax credit stand alone. In all cases, it isn’t as simple as a one item vote. It seems unfair to characterize either political party in a way that doesn’t reflect their approach or goals.

While some might see comments that create false or misleading perceptions as good politics, I am disappointed that the administration (as well as some of the shots taken by Republicans) fails to focus on solving a problem for their constituents.

The research and development tax credit is a critical component to the United State tax policy and growth. If we can’t, as a nation come together on something that all agree is good for the economy and people of the United States, I shudder to imagine how more controversial issues will ever get resolved. And while each is being debated, you and I are opening our checkbooks yet again to pay for the mudslinging and inaction.

Forgive me if I don’t give a standing ovation to Congress this year.

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