By Dean Zerbe, former Senior Counsel to the U.S. Senate Finance Committee and alliantgroup National Managing Director
The R&D Tax Credit was part of the tax extenders package that was signed into law at the end of last year. That legislation extended the credit (as well as a number of other tax extenders) until 12/31/2014—so businesses are basically right back where they were, needing yet another extension of the R&D Tax Credit. As many of you know, the extension of the R&D Tax Credit has become Congress’ answer to the swallows of Capistrano, having extended the R&D Tax Credit a host of times since the credit was first enacted in 1981.
As with the previous Congress, the House decided this spring to move forward with a separate bill to extend the R&D credit and make it permanent—HR 880—the “American Research and Competitiveness Act of 2015.” The legislation was introduced and championed by Congressman Kevin Brady (R-TX) who is a Congressman for the greater Houston-area and alliantgroup has been honored to have him come speak at one of our past “ThinkTank” events. (Congressman Brady was a terrific speaker I should add).
HR 880 has some important pro-business changes to the R&D Tax Credit of which practitioners and business owners need to be aware. First, HR 880 allows for the R&D Tax Credit to be taken against the Alternative Minimum Tax (AMT) (capped for companies with gross receipts of $50 million dollars), which is basically the provision that was in place for one year in the 2010 legislation. Oh happy day. As many of you know, this is a real game changer for small and medium businesses, allowing thousands of companies to utilize the R&D Tax Credit.
Second, the bill does away with the traditional means of calculating the credit and makes the Alternative Simplified Credit (ASC) the only means to calculate the credit. The key here is that the legislation raises the ASC rate from 14 percent to 20 percent—that is, in general, the research credit is equal to 20 percent of qualified research expenses that exceed 50 percent of the average qualified research expenses for the three preceding years.
The House Ways and Means Committee passed this legislation earlier in the year and the full House passed the legislation on May 20th on a bipartisan vote of 274–145. However, as similar to last year’s dust up on extenders, the administration indicated it opposed passage of a permanent extension of the R&D Tax Credit because of a lack of offsets (the cost is $180 billion over 10 years).
So now the action turns to the Senate. I expect the Senate to not act on specific extenders, but again, just as last year, to look at passing an entire tax extenders package. The Finance Committee was consumed with the recent trade bills and is only now coming up for air. Hopefully, in the next few weeks —before the August recess—we will start to get indications of how the Senate will proceed on tax extensions. The general view is that the pro-business reforms put forward by the House on R&D will be well received by the Senate (the AMT turnoff originated in the Senate and Chairman Hatch (R-UT) has introduced legislation increasing the ASC.
The upbeat outlook that is currently the fashion on the Hill and on K street is that we will deal with extenders in the early fall (maybe added to the highway bill) and get it out the door. It is highly likely it will be an extension (for all tax extenders) for no more than two years (no permanency) but a good chance the R&D tax reforms put forward by the House may see it through. Fingers crossed.