R&D Tax Credit – Congress? Hello?
We’ve all heard about taxes and tax credits this election season. The mainstream media (that being TV and radio) has been bombarding us about plans that include more taxes, less taxes, taxes on the rich, income tax break for the middle class, ‘death tax’, child tax credits, increase in payroll taxes, capital gains tax, alternative minimum tax, etc., etc., etc. However, we never hear anything about a very important tax credit that expired on December 31, 2007 that may drastically affect thousands of U.S. workers. That being the Research and Development (R&D) Tax Credit. This little discussed tax credit, which was first introduced into law in 1981, was designed as a government-sponsored benefit that provides cash incentives for companies conducting R&D in the U.S. These economic incentives are conservative, government sponsored programs backed by the Internal Revenue Service, Congress and the current administration in order to stimulate research and development in industries of all sizes, to encourage companies to work together and to transform the economic landscape.
More than $5 billion in federal R&D tax credit benefits are given out annually. That’s worth restating….more than $5 billion.
While the tax credit is expired, an increasing amount of research funding is being committed to countries such as Ireland, China and Canada with more attractive R&D tax incentives luring research jobs away from the United States
But unlike what you might think of as an R&D expense, a taxpayer is actually allowed to claim credit for qualified research expenditures (QREs) — costs associated with investments in innovation and improvements that go well beyond product R&D. For example, investments made in process improvements may qualify, and many manufacturers invest far more in improving their processes than in developing products. Another example is wages paid to line employees involved in research activities. Suppose an employee spent a month investigating ways to achieve an improvement (like evaluation of low emissions processes). The employee’s wages may be considered a QRE. Other areas in which QREs often hide in the company include quality assurance, engineering, product design, and in-house software development.
While not every dollar spent on R&D is recoverable by this credit, for many companies, their investment in R&D activities yield returns of up to six and one half percent (6.5%) in the form of a federal tax credit. And in some states (California), there are even additional state tax credits.
So who does this affect? Obviously, just about any U.S. based manufacturer. So while Congress spends the next several weeks/months arguing over off-shore drilling, all those folks that make their living doing R&D will simply hold their breath and wait (like they’ve done 12 times in the past), and hope Congress gets it right one more time and reinstitutes the R&D Tax Credit. Otherwise, Ireland, China and Canada will be very happy indeed!