On July 21, the Senate Finance Committee voted 23-3 on a tax-extenders package for various tax items, including the research and development (R&D) tax credit, state and local sales tax deductions, and the Section 179D tax deduction for energy-efficient commercial buildings.
If enacted into law, the legislation would extend these and other items through 2016, providing companies greater certainty regarding tax planning and their expected tax liability.
In addition, in the context of the R&D tax credit, this would likely lead to more manufacturers, software developers, and businesses across a variety of industries investing more in the development or improvement of their products, manufacturing processes, and the software they hold for sale, lease, or license or use in their businesses.
These kinds of activities, numerous studies over the past two decades have found, promote an increase in both the number of high-quality, high-paying jobs and gross domestic product.
This bill, which is especially beneficial to small businesses and startups, could further stimulate the American economy. Under the bill, small businesses would be allowed to claim the credit, not just against their regular income taxes, as is the case under present law, but also against their payroll taxes. This is important, as many startups and small businesses typically pay much less or no income tax, whereas they do have payroll tax liability.
Additionally, a piece of the provision would allow businesses to claim the R&D tax credit against their alternative minimum tax â a positive development for many companies that haven't been able to utilize the benefits of the credit in the past.
The next step is for the House of Representatives to consider the bill or introduce its own. Since its enactment in 1981, the R&D tax credit has expired multiple times and been extended more than 15 times, often being enacted only retroactively after the tax year for which the credit was being taken had ended. One year, almost two decades ago, from July 1, 1995 through June 30, 1996, the credit didn't exist.
Recent actions by lawmakers in the House and Senate suggest that the credit will continue to exist and help promote US innovation.
Material discussed is meant to provide general information and should not be acted upon without first obtaining professional advice appropriately tailored to your individual circumstances.
About the authors:
Chai Hoang is a senior associate in the R&D Tax Services practice at BDO USA LLP.Joseph Eliya is an associate in the firm's R&D Tax Services practice.