The Senate Finance Committee Approves an Enhanced Research Tax Credit
On July 21, the Senate Finance Committee approved a two-year extension of the Research Tax Credit. In a roll-call vote, the Committee endorsed an extension of the research credit and several dozen other business tax credits and deductions through the end of 2016 by a margin of 23-3.
The bill put forth by the Finance Committee last week is seen by Senate leaders as being especially important to small manufacturing and software development businesses and a key component to expanding the U.S. economy. In addition to extending the research credit, the bill provides two important enhancements for small businesses. Start-up businesses would be allowed to claim the credit, not just against regular income tax as is the case under present law, but also against payroll taxes. This is a significant improvement as many “start-ups” pay little or no income tax and therefore receive limited benefit from the credit and the ability to reinvest in their businesses. A second important provision of the proposed legislation would permit the shareholders of sub-S corporations and LLCs to claim the research credit against alternative minimum tax, allowing such companies to benefit from the credit in a manner they’ve been unable to do so in the past.
In his opening statement, Ranking Committee Member Sen. Ron Wyden [D-Oregon], said he hoped that, once the committee approved the legislation, “the Senate will act quickly to get this legislation to the President’s desk as soon as possible”. If enacted quickly into law, manufacturers and technology companies would enjoy greater certainty with respect to planning and investing in their businesses.
The Tax Increase Prevention Act of 2014, enacted in the final weeks of 2014, retroactively extended the Research Tax Credit and many of the temporary tax “extenders” through December 31, 2014. The present tax extenders bill, if approved by both chambers of Congress and the President, would mark the 15th time the credit has been extended since its inception back in 1981.
According to recent studies, the extension of the Research Tax Credit would encourage manufacturers, software developers and other technology businesses to invest in the development of new and improved products, manufacturing processes and software for sale, lease, license or use in their businesses. Studies conducted over the past two decades revealed that investment in the aforementioned activities promotes an increase in both the number of high-quality, high-paying jobs and gross domestic product.
Senate Finance Committee Chairman Orrin Hatch [R-Utah] commented saying, “All of these tax provisions are meant to be incentives-they are meant to encourage and promote certain activities. If they are expired, they aren’t doing much good. That being the case, we need to move this package forward as soon as possible. This package of extenders includes provisions that will assist hardworking families, individuals, and small businesses. While some tend to write off tax extenders as special-interest giveaways, in terms of dollars, the bulk of the extenders in this package go toward very popular, widely applicable provisions. To be exact, 51 percent of the dollars at play in this bill can be attributed to the following provisions: the research and development tax credit, small business expensing, the state and local sales tax deduction, bonus depreciation, and active financing income.”
As for what happens next, the Senate is expected to begin deliberating the tax extenders bill in the coming weeks and it is anticipated that the measure will come to a vote in early September. Should the bill be approved, the question then becomes, will the House of Representatives introduce a similar piece of legislation, approve the Senate’s version of the bill or will Congress merge the America Competes Reauthorization Act passed by the House in May of 2015 with the Senate’s extender bill, which would further enhance the research credit and make it permanent?