The (Potential) Rebirth of the R&D Tax Credit

First enacted in 1981, the federal research and development tax credit (‘R&D credit’) expired, once again, as of December 31, 2013. Of course, over the past three decades, the R&D credit has died – and been resurrected by Congress – more than one dozen times, but has never been made permanent.

The good news: The outlook seems outstanding that a credit – substantially similar to the present R&D credit under IRC section 41 – will be extended retroactively for 2014 (and, likely, 2015) industry expenditures for research and development. The bad news: Despite bipartisan support from the tax-writing committees in both houses of Congress, it appears that the R&D credit may not be officially brought back into the tax code until after the November 2014 elections.

On one hand, the House has approved legislation (H.R. 4438) that would permanently extend and simplify the R&D credit. For example, that bill would eliminate the traditional method of calculating the R&D credit and would increase the percentage used to calculate the allowable credit from 14% to 20%.

On the other hand, the Senate is favoring legislation (S. 2260) that would only extend the existing R&D credit until December 31, 2015. However, that bill would also allow some start-up businesses to claim the R&D credit against payroll taxes, and would allow some privately -held companies to claim the R&D credit against their Alternative Minimum Tax liability.

Before any legislation is enacted, the House of Representatives and Senate will need to agree on a final bill that reconciles both proposals. However, leaders of both political parties, in both houses of Congress, seem to agree that it is essential to provide an incentive – such as the R&D credit – for companies to innovate.