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The Federal Research Tax Credit Expired on December 31 – What happens now?

The federal Credit for Increasing Research Activities, one of the most valuable tax breaks for U.S. manufacturing and technology companies, expired on December 31. The expiration marks the ninth time the R&D tax credit has elapsed. So, should American businesses be concerned the credit will not be available for 2014 and the coming years?

No doubt, the expiration of the credit creates a measure of uncertainty for companies considering plans for new product and process development efforts or investments in technology during the coming year. Without the credit to offset future tax liabilities, many businesses will defer purchasing new process equipment or hiring employees to carry out development work.

It’s important to note that the research tax credit was first authorized more than three decades ago as part of the Economic Recovery Tax Act of 1981 to spur R&D spending in the United States. The credit, which is not a permanent tax regulation, must be extended every year or so. To date, Congress has extended the credit in either one or two year increments fourteen times since it was initiated. Most recently, the credit expired at the end of 2011 and was extended retroactively on New Year’s Day 2013 for the period Jan. 1, 2012 through Dec. 31, 2013.

So, what does the future hold for the R&D tax credit? Most tax experts agree the credit will be extended once again. On December 19, Senator Harry Reid [D] introduced to the Senate a bill entitled Tax Extenders Act of 2013, which would extend 55 temporary IRS tax regulations that expired on Dec. 31. The bill introduced by Reid, which includes a one-year extension of the research credit, has been placed on the Senate calendar for discussion in January.

In addition to the Tax Extenders Act of 2013, there’s hopeful news from Washington. A host of separate bills have been proposed in the House of Representatives and the Senate over the past year. Most noteworthy is House bill H.R. 422, cosponsored by Representatives Kendrick Meek [D] and Kevin Brady [R], which proposes to make the credit permanent and increase the Alternative Simplified Credit from 14% to 20%. Similarly, Senators Max Baucus [D] and Orrin Hatch [R] are the cosponsors of bill S. 1203, which proposes to make the credit permanent, increase the Alternative Simplified Credit from 14% to 20% as well as terminate the Regular Credit calculation method.

Carpe diem!

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