So, is it or isn’t it? Tracking the R&D Tax Credit
Is the federal government’s Research & Development Tax Credit in effect?
The credit, also known as IRC § 41, has been on the books in one form or another since 1981. It has been extended or reinstated almost continuously since its inception but, despite efforts from lawmakers, it has yet to made permanent. The notable history of the credit is filled with stories reminiscent of mythology, from birth and new life, through death, resurrection, death again, second resurrection, and so on …, having been brought back to life at least a dozen times.
In order to combat the perception that America had begun to allow competing nations, such as West Germany and Japan, start to catch up in terms of industrial innovation and development, President Ronald Regan signed “The Economic Recovery Tax Act” (ERTA) in 1981, which included a tax credit for increases in research spending. Over the years, the law has been expanded and many more types of businesses have been able to apply this credit to their research and product development expenditures.
Debate continues among economists and other researchers as to whether or not the credit has ever achieved it goal of increasing research spending in the United States, but the general consensus is that it has helped, at least a little. Where the R&D credit has enjoyed pointed success is in the realm of small business. Small businesses are always looking for ways to trim tax expenses, so when the R&D credit was expanded to include a broader definition of product development activities start-ups and even existing small companies realized that many of the activities they were already doing qualified for the credit.
Identifying qualifying expenditures to apply the R&D credit has been one of the major pitfalls of the legislation, and one of the reasons smaller companies have often shied away from it. But it turns out that much of the product development functions of small businesses, particularly start-ups, do qualify for the credit. For this reason the R&D credit has become an important way for many businesses to alleviate their tax burden and increased the pressure on lawmakers to keep it active.
But the R&D credit that has been in effect for the past several years is part of the larger package of cuts and credits known as the Bush-era tax cuts. That package has been given a series of one-year extensions every year, until it expired on December 31, 2011. So, as of this writing the R&D tax credit is not in effect?
“You are basically correct,” says Andrew Brody, an accountant in Florida and Managing Partner at the reputable Miami-area CPA firm Caner, Brody & Yan, but, “with a large caveat.” The caveat is that while it did expire, that doesn’t mean it’s dead — yet.
“It’s is in a state of abeyance,” says Brody. So, does that mean it’s going to be brought back? Maybe. According to Brody two scenarios are possible. One, the law will be reinstated before the end of the year and the Bush tax cuts, with the R&D credit along for the ride, will be able to be applied retroactively to Jan. 1, 2012. Or, two, no compromise can be reached between the President and Congress and the code will revert to pre-Bush standards, sans the R&D tax credit.
Brody feels the First scenario is the more likely, but he admits, “Currently, no one knows definitively whether the law will be extended to 2012.”
But, since this is an election year that makes the whole process even more unpredictable., for two reasons. First, since every piece of legislation that goes before Congress becomes a campaign issue, if a bill brought forth by the Democrats passes and is signed, it’s a win for the President; if it doesn’t get through Congress it’s a win for Republicans, and vice-versa. Secondly, the “Bush-era tax cuts” is a phrase that has enjoyed significant media attention since the last day of the former President’s administration and the entire package of cuts and loopholes are marketed by politicos as a single unit. For Republicans and conservative voters, preserving the entire package is a top priority, but allowing those cuts to expire is the goal for Democrats and their supporters. There has been remarkably little talk of the possibility that Congress could take the Bush cuts apart and either reinstitute or not reinstitute the cuts as individual pieces. So, whether or not the R&D credit is a good for innovation or good for business in general, it likely will not be considered on its own merits and will stay lumped in with the rest of the Bush tax cuts, for better or worse.
That is the situation for now, but after the election in November the situation will be different. Regardless of the election results, lawmakers will have a break from worrying about voters (and opponents) scrutinizing each and every vote on each and every bill, so taking up more complicated issues will not be so daunting. If the Bush cuts have not yet been extended by then, Congress will have a good month to figure out a way to get either the entire package back on the books or take the previously inconceivable step of looking at the cuts individually, which could save the R&D credit once again.
But if the election changes the power landscape in Congress or the White House the R&D credit may have a good chance at survival — or it may not. If the Bush cuts are not reinstated under the current administration, and Republicans win the White house and keep the House of Representatives, chances are good that the Bush-era tax cuts will be back in effect no later that January 21, 2013 with plenty of time to be applied to the previous years’ tax returns. However if the Democrats stay in control of the Presidency and the Senate and also win the House, then the Bush tax cuts may have a grim future.
While Brody says that what is likely to happen is that Congress and the President will come to some sort of agreement by the end of 2012 to extend the Bush tax cuts, it is also certainly possible that no agreement will be reached and the R&D tax cut will not be around for tax filings next April. Does that mean the story of the Research and Development Tax Credit will finally come to an end?
Andrew Brody is author of this article. To know more about Tax Preparer Miami and Accountant in Florida, Please visit Miami Accounting Firm
Processing your request, Please wait....
