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- Permanent R&D Credit in 2014?
Bruce Stubbs, JD, LLM
Permanent R&D Credit in 2014?
By Bruce Stubbs, JD, LLM
AGH Specialized Tax Solutions
April 15, 2014
Updated August 6, 2014
Anyone who claims an R&D tax credit, or those of us who provide R&D credit consulting services, have wished for years the credit would be made permanent to add some certainty and allow companies to plan their research initiatives. 2014 is no exception, as Congress works once again to retroactively extend the credit for another 2-year period and seek to make it permanent.
The Legislation Being Discussed
On April 3rd, the Senate Finance Committee passed an $85 billion tax extender package - the Expiring Provisions Improvement Reform and Efficiency (EXPIRE) Bill. The bill would provide:
- 2-year retroactive extension through 2015;
- Allow the credit to offset Alternative Minimum Tax (AMT);
- Allow qualifying startup businesses (those less than 5 years old with gross receipts less than $5 million) to offset payroll taxes up to $250,000 per year; and
- Retain the ability to elect the reduced credit under Sec. 280C and avoid reducing otherwise allowed deductions.
A much different package with an overall negative impact on taxpayers is contained in the sweeping tax reform discussion draft released by the Committee on Ways and Means, Chairman Dave Camp, R-MI.
Positive provisions include:
- Alternative Simplified Credit (ASC) made permanent;
- Increase in ASC credit rate of 1%, from 14% to 15%;
- Increase in ASC credit rate for taxpayers with no qualified expenses in any 1 of the 3 prior tax years to 10% from current 6%; and
- the regular credit method using a 20% credit rate would be repealed.
The bill states the 10-year cost (2014-2023) is $34.1 billion.
Significant unfavorable provisions for taxpayers contained in the Committee of Ways and Means package include:
- Amounts paid for supplies or computer software would no longer qualify for the credit. (That's right, prototype supply costs would no longer qualify!);
- All qualified outside contract services are included at a 65% rate, the higher and special rates of 75% or 100% would be eliminated;
- The ability to make the reduced credit election under Sec. 280C and avoid having to reduce otherwise allowed deductions would be repealed; and
- If the removal of supply costs and the other proposed changes weren't bad enough, all Research & Experimentation (R&E) expenditures would be amortized over a 5-year period.
The 5-year amortization provision is projected to increase government revenue over the next 10 years (2014-2023) by $192.6 billion.
The Impact on You
Thus, although a victory is achieved by the ASC being made permanent, it would come at a significant cost to taxpayers under the Committee of Ways and Means current proposal. The government would be the ultimate winner with a projected net increase in revenue of around $158.5 billion.
2014 is once again an interesting year for the R&D Credit. It was hoped the Senate tax extender bill would make it through the House and be signed into law before the scheduled August break. However, this has not happened and we shall have to once again wait and see what type of negotiations take place in Congress. Clearly, some proposals are not ideal for taxpayers.
Be careful what you wish for. Would you or your company be willing to accept the negative impact contained in the Committee on Ways and Means provisions in order to make the credit permanent?
The Senate EXPIRE Bill can be viewed at http://tinyurl.com/EXPIREbill (shortened link).
AGH Specialized Tax Solutions' professionals will watch this legislation closely and keep you informed. If you have any questions, please contact Bruce Stubbs, AGH Specialized Tax Solutions vice president and research and development tax credit practice leader at email@example.com or toll free 844-787-2121.
Any discussion of tax matters contained herein is not intended or written to be tax advice, and cannot be relied upon as such, nor can it be used for the purpose of: (i) avoiding tax penalties that may be imposed by the IRS or states, or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. If you seek definitive tax advice on a matter, please request a written tax memorandum from your AGH tax advisor.