Federal R&D Tax Credit to Become Permanent?

Legislation that would extend and expand the federal research tax credit was introduced in the U.S. Senate last month. Senate Bill 627 seeks to make permanent the research credit that was first enacted in 1981 and is set to expire Dec. 31, 2005. The bill, sponsored by Orrin Hatch (R-Utah), also would provide an alternative simplified credit for qualified research expenses and increase the rates of the alternative incremental credit.

The simplified credit addresses changes in business models and economic circumstances that currently prevents some businesses from using the credit. Under S.B. 627, companies could receive a credit of 12 percent for qualified research expenses that exceed 50 percent of the average of those expenses for the three previous years. The credit would be 6 percent for companies having qualified research expenses in just one year.

Qualified research expenses include in-house expenses for wages paid and supplies used in the conduct of qualified research, and up to 75 percent of contract expenses for qualified research, according to the Internal Revenue Service. The credit presently is equal to the sum of 20 percent of the excess of qualified research expenditures for the taxable year over a base amount, and 20 percent of basic research payments.

The alternative incremental credit tax credit is available for companies having dramatically increasing sales figures or otherwise stagnant research expenditures. Under S.B. 627, rates for this three-tiered credit would increase from 2.65 percent to 3 percent, 3.2 percent to 4 percent, and 3.75 percent to 5 percent.

In introducing the bill, Hatch said the regular research credit would serve as a staple to the thousands of research-based companies in his state, Utah, where high tech jobs paid nearly 10 percent of wages in 2004 -- this, despite comprising only 5 percent of the state's workforce. The legislation cites the impact of R&D performed in the U.S. to produce "quality jobs, better and safer products, increased ownership of technology-based intellectual property, and higher productivity in the United States."

The federal R&D tax credit has been extended a dozen times since it was first offered in 1981. At least 34 states have their own versions of the R&D credit, but several states have recently considered eliminating their R&D tax credit - most notably California.

S.B. 627, the Investment in America Act of 2005, has been referred to the Committee on Finance; it is available through Thomas Locator at http://thomas.loc.gov/. For more information on the federal research tax credit, visit: http://www.irs.gov/businesses/small/industries/article/0,,id=97643,00.html#aic