Before Congress adjourned on Friday, March 27 for its two-week Easter recess, both the House and Senate passed their respective Fiscal Year (FY) 2016 budget resolutions. The budget resolution is considered a blueprint for Congress’ spending priorities for the coming fiscal year. By law, Congress must pass and agree on a budget resolution by April 15th. What is important to remember is that the resolution is non-binding and is not signed by the President; it’s just an agreement between the two chambers. The congressional budget process is lengthy, requiring significant floor time and votes on a large number of amendments.
In the House budget resolution, tax reform was loosely outlined, with the emphasis on “comprehensive” by lowering both the individual tax code and the corporate tax code and repealing the Alternative Minimum Tax. Beyond that, the details are slim and elusive as to what exactly “tax reform” would entail.
Also, the House budget resolution is silent on tax extenders, the package of tax incentives that included an extension of R&D and 179D that expired December 31, 2014. Some have suggested that this silence indicates that some House Republicans want extenders to “go away.” However, history has shown that Congress has taken action to extend lapsed tax extenders packages previously and extenders will likely prevail this Congress as well (although it may be later this year or slip into next year).
The Senate budget resolution calls for tax reform, though details are limited. The resolution also includes an extension of “certain expiring tax relief provisions” – also known as tax extenders and legislation relating to innovation and high quality manufacturing jobs, including the repeal of the 2.3 percent excise tax on medical device manufacturers.
What’s next? Once Congress returns from their two-week recess, they will have to come together, also known as conference, and agree on one final budget resolution before April 15th.
Also, for those curious on the status of federal R&D and 179D legislation – here’s the latest:
179D – No bill has been introduced yet in either chamber, but efforts are underway to have a Senate bill be introduced in April, with the expectation of bipartisan support. Stay tuned for an update next month. As for the House, once a Senate bill is introduced, it will help advocate for a House companion bill.
H.R. 880 – sponsored by Rep. Kevin Brady (R-TX) and entitled, The American Research and Competitiveness Act of 2015. The bill currently has 12 cosponsors. It was introduced on February 11, 2015, and was marked up and passed by the House Ways and Means Committee on February 12, 2015. The bill would make the R&D tax credit permanent and the alternative simplified credit would now be the only method for calculating the tax credit for qualified research expenses. The bill will also generally increase the associated credit to 20 percent of those expenses that exceed 50 percent of the average qualified research expenses for the three preceding taxable years. It also includes the provision to turn off the individual AMT for pass-throughs, so everyone who qualifies for R&D can claim it. The bill is now awaiting floor action.
S. 455 – The Innovators Job Creation Act introduced by Senators Pat Roberts (R-KS), Chris Coons (D-DE) and Charles Schumer (D-NY). The bill was introduced on February 11, 2015, and was referred to the U.S. Senate Finance Committee. The Innovators Job Creation Act would allow the R&D credit to be claimed against the Alternative Minimum Tax. Even if a company is entitled to the R&D credit, many pass-through entities cannot claim it because the R&D credit cannot be used against the Alternative Minimum Tax. The bill would also enable startup firms to claim the R&D credit, by claiming against their employment taxes. If a startup company cannot access the R&D credit because it does not have an income tax liability, it can claim the R&D credit against taxes it pays on employee wages. The benefit is capped at $250,000 per company per year. The bill is currently awaiting consideration by the Senate Finance Committee.