Everyone likes predictability, especially when tax breaks are involved. But there's been precious little certainty when it comes to the very popular research and development (R&D) tax credit. That's because so far, lawmakers have only opted to renew the credit one year at a time. And in one case, lawmakers even let the credit lapse--from mid-1995 to mid-1996--before finally reinstating it in a modified form.
Once again, the credit is up for renewal. The law expired in June, and companies who have used the credit in the past are waiting for Congress to renew it.
Business owners are again calling for more than a one-year extension. They say that not knowing from one year to the next whether the credit will survive makes it difficult to forecast costs on long-term research projects. Some analysts speculate that the uncertainty of the credit has probably caused companies to trim their R&D spending. John Wilkins, national director for tax policy economics with Coopers & Lybrand LLP agrees that it discourages investment.
With the R&D credit, companies can receive a net tax credit of up to 13 percent against qualifying R&D costs. Wilkins explains that this tax break doesn't apply to all of a company's R&D costs but to increases in R&D over a base period.
A study conducted by Coopers & Lybrand for a coalition of business interests found that making the credit permanent would provide substantial economic benefits--for the federal government as well as the affected companies. If the credit became permanent, it would generate enough additional economic activity to pay for itself due to its impact on productivity gains and economic growth, which would in turn increase federal revenue.
According to the study, if the credit became permanent, businesses would spend an additional $41 billion on R&D between 1998 and 2010. Another positive outcome: Additional R&D spending would increase the nation's productivity, adding more than $13 billion per year to the economy's productive capacity by 2010.
But lawmakers and the White House view the credit differently, says Wilkins. "They don't look to see how the economy might be improved and what revenue might come from that," he says. Instead, Washington is more concerned about the cost of making the credit a permanent fixture in the tax code. Under the budget rules, Congress would be required to find a way to pay for the credit over the long term. Extending the credit annually means lawmakers only have to find a way to pay for it for one year.
Unfortunately, the yearly R&D ritual is expected to continue--but it has a history of being renewed every time. And in Wilkins' opinion, "It's a virtual certainty the credit will be extended at least on an annual basis."
Joan Szabo is a writer in McLean, Virginia, who has reported on tax issues for more than 12 years.