President Obama this afternoon signed into law H.R. 5297, the Small Business Jobs and Credit Act, which allows businesses of all sizes to immediately write-off 50 percent of the cost of depreciable property purchased and placed in service anytime during 2010.  This provision is a temporary extension of the bonus depreciation provision included in both the 2008 and 2009 economic stimulus laws.  The new law also includes a provision that increases Section 179 expensing for two years by increasing the expense limitation to $500,000 with a phase-out threshold of $2 million for years 2010 and 2011.

The bonus depreciation provisions will encourage manufacturers to make investments that create jobs.  For example, Joseph McGlynn, executive vice president of Campbell Fittings Inc., a small manufacturer of industrial hose couplings in Boyertown, Pa., is working now to purchase factory floor equipment that will be eligible for the 50 percent  bonus depreciation extension available thanks to the new law. The company plans to hire an additional 4-5 employees to run two new pieces of equipment it hopes to purchase and have operating before year’s end.   

For a technical explanation of the new investment incentives, see pages 7-15 of the Joint Committee on Taxation technical explanation.

Details on the 2010 bonus depreciation and expensing provisions, prepared by Deloitte, can be viewed on the NAM website on pages 2 and 3.

As the continued anemic economic recovery with high unemployment challenges manufacturers, bravo that Congress finally acted, albeit nine months into the year, in passing a proven business capital investment tax incentive that garnered bipartisan support.  Specifically, the tax relief included in the now-passed Small Business Jobs and Credit Act , H.R. 5297, will allow businesses of all sizes faster recovery of investment costs by permitting businesses to immediately write-off in the first year 50 percent of the cost of depreciable property purchased and placed in service in 2010.*

Jobs will be saved and jobs created with this investment incentive, as there are customers who want to buy and sellers who want to sell new equipment.  And it takes workers to manufacture and run such equipment.  The positive ripple effect of this new law will be immediate. 

After yesterday’s House passage of this provision, two testimonials quickly arrived in my e-mail. One Midwest small manufacturer reports he will now spend $150,000 on new equipment and hire seven full time employees and one part-time employee to operate the new plant equipment. Another East Coast small manufacturer told me he is quickly ordering new equipment and will hire an additional 4-5 more employees to run it. 

Bonus depreciation will allow manufacturers to act, that is, to purchase and sell machinery and plant floor equipment and put workers back to work. We look forward to President Obama signing the bill on Monday.

* The bonus depreciation extension in H.R. 5297 — which passed by a vote of 237-187 – is a temporary extension through 2010 of the bonus depreciation included in both the 2008 and 2009 economic stimulus laws.  The President’s Fiscal Year 2011 Budget included an extension of bonus depreciation through 2010. Also included in the new law is an increase in Section 179 expensing for two years. 

The Wall Street Journal last weekend published an op-ed by Tufts University professor Amar Bhidé arguing against the efficacy of the federal research and development tax credit, “Don’t Expect Much From the R&D Tax Credit.”

Bhidé’s argument falls short because he barely acknowledges the global competitive realities faced by manufacturers in the United States, including the growing race for R&D investment dollars worldwide. (It’s an odd oversight coming from a professor from Tufts, an institution with a sterling reputation for studies in diplomacy and international economics.)

Congressional failure to renew the R&D tax credit, which expired last December, would represent a unilateral surrender in this competition. Innovation and jobs would both suffer as companies adjusted their domestic R&D to reflect the U.S. abandoning the race.

A few key facts:

• In 2009, 21 OECD countries offered R&D tax incentives — 16 of which offered stronger incentives than the United States — compared to just 12 OECD in 1996. This 75 percent increase over 15 years is anything but coincidental, but rather a targeted effort by countries to jumpstart technological advancements and innovations by the private sector.
• The U.S. share of global R&D has fallen from 39 percent in 1999 to 33 percent in 2007, while China’s share increased fourfold. (Source: Organization for Economic Co-operation and Development, “Ministerial Report on the OECD Innovation Strategy,” May 2010)
• China surpassed Japan’s ranking in 2009, taking the No. 2 spot behind the U.S. in world R&D spending.

Nearly 18,000 companies use the credit, far more than just the largest companies with large R&D budgets. Indeed, companies of all sizes doing R&D on American soil continue to be courted, in some cases aggressively, by other countries to move their U.S.-based R&D offshore.

The U.S tax credit is available only for research and development performed in the United States. IRS statistics further show that the R&D credit is a jobs credit – 70 percent of the claims made against the credit are for employee salaries.

Manufacturers are keenly aware of the tax credit’s incentives and impact. The manufacturing sector accounts for nearly 70 percent of R&D credit claims and performed 70 percent of all business R&D in the United States. The emphasis is understandable: R&D fuels the innovation that drive new product development and increased productivity — two necessary factors for growth in manufacturing.

The professor’s arguments make might sense in a theoretical setting, but manufacturers live in the real world where many countries are competing for companies that do research and development. From a manufacturer’s perspective, a more accurate title for Professor Bhidé’s op-ed might have been, “Don’t Expect Much if the R&D Tax Credit is NOT Renewed, Strengthened & Made Permanent.”

It is no secret that the United States’ position as a world leader in research and development is slipping as the world gets flatter, evidenced by the growth of R&D popping up around the globe, attracted by more generous R&D tax incentives. With major U.S. trading partners offering refundable R&D credits or super tax deductions, the attraction for U.S.-based R&D to move offshore is proving to be strong. No surprise when the French minister of Higher Education and Research visited Washington, D.C., this month that she touted her government’s R&D tax incentive as the best one offered among EU countries. In the mid-1980s, the U.S. had the strongest R&D tax incentive among OECD countries. By 2009, the U.S. R&D tax credit ranked 17 out of 21 countries offering an R&D tax incentive. Today, the United States ranks dead last with an expired credit!

And prospects for renewing the U.S. R&D tax credit this year grow dimmer as Congress fails to act despite bipartisan, bicameral support and President Obama’s repeated championing of the credit. Manufacturers are the biggest users of this jobs credit, claiming nearly 70 percent of R&D credits. Why? Because R&D fuels innovations and technological advancements that translate into new products and increased productivity—two necessary components for growth in manufacturing.

With the manufacturing sector having lost two-plus million jobs in the recession that began in December 2007, a sure bet to keeping high skilled, high wage R&D jobs in the United States is to seamlessly renew the credit in the short term, and strengthen and make permanent the credit in the long term. More than 70 percent of R&D Credit dollars are attributable to wages, U.S. wages only, because the credit only applies to research performed in the United States.

With unemployment hovering around 10 percent, swift congressional action to renew the credit would be a formidable step in saving and in comes cases creating jobs, in addition to boosting the incentive value of the Credit because companies would be certain that the credit will be available for R&D done in the United States in 2010. I hope House Majority Leader Hoyer’s public comments of July 23, “My own personal view would be to make it retroactive again” become true. The credit has been extended temporarily 13 times since it was enacted in 1981, 10 times packaged with permanent tax increases and the remaining times with other tax increases. There was a permanent gap of no credit from mid-1995 to mid-1996. To have an anemic credit restored is better than to have no credit at all, if the United States is serious about competing in the global race for R&D investment dollars.

The Senate just this afternoon cleared final passage by a vote of 62 to 36 of a Jobs/Unemployment Benefits/Tax Extenders bill (H.R. 4213) that restores the proven tax incentive to keep jobs here in the United States and place our country in the global race for investment dollars. 

How does it keep jobs here?  The credit cuts the cost of doing R&D here in the United States.  More than 70 percent of credit dollars are attributable to R&D wages (remainder is used for supplies & materials).  What race?  The race that has 20 OECD countries, many of which are our major trading partners, offering an R&D tax incentive while the U.S. watches R&D drift offshore attracted by more generous and often permanent R&D tax incentives.

Manufacturers, which must be high-tech to survive in a fiercely competitive global market, are innovators, using R&D to develop new products and increase productivity.  Manufacturers lead innovation, create opportunity, and pursue progress.  R&D drives all three of these characteristics of a modern manufacturer.

Next step:  Congress should send ASAP to the President a tax bill that fully restores the R&D tax credit. 

Monica M. McGuire is senior policy director for taxation at the National Association of Manufactures and serves as executive secretary of the R&D Credit Coalition.

Given the severe economic challenges facing our nation, policymakers are wise to look at tax relief to help carry many American businesses during a very rough patch. Contrary to the claims raised in recent stories in The Wall Street Journal (“Write-Offs a Boon to Builders, Bankers“) and the Washington Post (“Lawmakers and Financial Experts Question Obama’s Tax Cuts“), extending the period in which struggling companies can “carry back” current net operating losses or NOLs will help a wide cross-section of industries, including the manufacturing sector. The press needs only to look at a recent letter to Congress urging prompt enactment of NOL relief, which was signed by some 70 trade associations, to see the broad range of interest in the proposal.

Notably, the NOL carryback proposal it describes falls squarely within the three factors the Post’s editorial board uses to judge tax provisions in the stimulus package: targeted, timely, and temporary. (“Dr. Obama’s cure.”) It’s also important to understand that this tax relief is purely a timing issue, helping companies gain quick access to cash now rather than in the future. Specifically, the relief would temporarily change the current carryback period from 2 to 5 years for NOLs incurred in 2008 and 2009.

For manufacturers, NOL relief has a proven track record of helping companies and workers through tough times. In the wake of the 9/11 terrorist attacks, legislators extended the carryback period, a life saver for many manufacturers and manufacturing jobs. In fact, the CEO of one NAM member company, Owens-Illinois’ Joseph Lemieux, wrote a letter to President Bush citing the jobs restored and the plant reopened as a direct result of the enacted NOL relief. Union leaders, company management, and employees collectively praised the plant reopening back in April 2002. (See this AP story for more.) Previous NOL relief enacted in 1997 also produced effective results.

The proven track record of NOL relief speaks volumes, not rhetoric. Bottom line, struggling companies will be able to get an infusion of cash right now, when they need it the most.