While there are design features about the existing research and development tax credit that might need improvement, the first order of the day is to simply get the credit made permanent, Emily McMahon, deputy assistant treasury secretary for tax policy, said Feb. 24.
“If Congress is interested in improving the credit, we would certainly be interested in that,” McMahon said. The administration has been focused on permanence, however, because it is difficult to change the rules when Congress has been in the mode of one-year extensions, often retroactively, she said.
Speaking at a Tax Council Policy Institute conference, McMahon said one of the factors that will need to be considered in terms of permanency is cost, noting that it would cost more than $80 billion over a 10-year period to make the credit permanent. “We think it’s worth it, but there are a lot of choices people have to make every year, and that’s a tangible amount we have to throw into the mix,” she said.
The existing R&D credit expired Dec. 31, 2009. The Obama administration, in its fiscal 2011 budget plan, proposed making it permanent as of Jan. 1, 2010 (20 DTR GG-1, 2/2/10).
Under current law, the tax credit for research and experimentation is 20 percent of qualified research expenses above a base amount, according to the Treasury greenbook. The base amount is the product of the taxpayer’s “fixed base percentage” and the average of the taxpayer’s gross receipts for the four preceding years. The taxpayer’s fixed base percentage generally is the ratio of its research expenses to gross receipts for the 1984-88 period. The base amount cannot be less than 50 percent of the taxpayer’s qualified research expenses for the taxable year (20 DTR Text Supplement, 2/2/10).
Taxpayers can elect the alternative simplified credit (ASC), which is equal to 14 percent of qualified research expenses that exceed 50 percent of the average qualified research expenses for the three preceding taxable years. Under the ASC, the rate is reduced to 6 percent if a taxpayer has no qualified research expenses in any one of the three preceding taxable years.
Uncertainty Decreases Effectiveness
A panel at the TCPI conference explored tax incentives for innovation and U.S. competitiveness and discussed some of the problems with the R&D credit.
Uncertainty about the future availability of the credit has diminished its incentive effect, panelists said, because it is difficult for taxpayers to factor the credit into decisions to invest in research projects that will not be initiated and completed prior to the credit’s expiration.
The U.S. incentive is purely incremental, so companies only receive a credit here to the extent their activities exceed an amount that represents an amount the company would have spent on research anyway, said Michael Goldbas, principal with Deloitte Tax LLP. The theory is that companies should not be rewarded for research they would have undertaken without the credit; therefore, the credit is only awarded for research done above a base amount.
The U.S. calculation is also very complicated, he said, comprised as it is of a ratio that looks back to the 1980s. “It’s very labor intensive and creates a lot of uncertainty,” he said.
Goldbas noted that while the United States was a pioneer in research incentives and was rated number one until about 1990, no other country has attempted to plagiarize its calculation or credit. The other 30 countries offering the credit are aware of its evolution in the United States and have steered clear of it, he said.
He also said some of the newer regimes are offering a volume-based credit or “super deduction,” in which additional incentives are offered for increases in research over the average amount of money spent on research over the last three years. He said that incentive is needed in the United States so it can compete.
With the incremental credit, Goldbas said, researchers cannot tell how much of a benefit they will be getting. When companies present research and development projects to management for funding, they need to be able to factor in the credit, he said. Some projects have a five-year window. With an incremental credit, not knowing what all the amounts will be makes it almost impossible to predict the benefit of a project and whether it should be funded over some other project, he said. A volume-based credit would allow researchers to at least know that 25 percent of all their costs will be returned in benefits on the tax side, he said.
New Locations
Nancy Palmintere, the head of tax for Intel Corp., said that certainty at a number of levels is a of prime importance to her company when scouting out new research and development sites internationally. One of the main things that has changed over the last few years is that there are many more countries where research and development can be located, she said. Cost is a very critical factor, she said, but many other factors come first. The country chosen must also meet a variety of infrastructure and people requirements, she said.
Some of the considerations for Intel have been working with a particular country to develop a market, finding the right talent and being able to sustain the talent in that market, the stability of the government of the country in question, and the stability of its economy.
