Manufacturers know first-hand that the lack of a permanent tax incentive for R&D investment is negatively impacting US competitiveness in the global economy. Instead, the US R&D tax credit is constantly being extended temporarily and allowed to expire before companies can even consider factoring in the credit for their future investment budgets. Meanwhile, other countries are ramping up their R&D investment incentives and courting US manufacturers to look abroad. (continue reading…)
Tag: R&D Tax Credit
The Department of Treasury and IRS released new guidance last week on the ability of a company to claim the R&D tax credit on computer software that is developed primarily for the company’s internal use.
Manufacturers may be pleased with the guidance since companies are currently unable to count computer software research intended for the company’s own use as a qualified research expense for the purpose of the credit. The proposal more clearly specifies what types of software would be excluded from using the R&D credit (i.e. software used for administrative functions), and provides examples that may be helpful in determining which activities would qualify for the credit. (continue reading…)
Ever wonder why the R&D credit is so important and why it needs to be made permanent? Well, if you have two minutes to spare, you can learn exactly why a permanent R&D credit would boost US innovation and jobs by watching The Tech CEO Council’s “Make the R&D Tax Credit Permanent” video. The video calls on Congress to make the credit permanent once and for all. The NAM agrees — it’s time to give manufacturers the certainty they need to once again make the US the world’s leading innovator. Click here to watch the video, and help spread the word that the R&D credit should be reinstated and made permanent now.
Manufacturers continue to tell Congress that failure to renew the expired tax provisions typically contained in the “tax extenders” package creates unnecessary uncertainty and sidelines business investments. Now, even the agency responsible for carrying out U.S. tax laws is joining the debate.
Stating he is “concerned” that Congress will likely not approve a tax extenders package until later this year, John Dalrymple, the IRS deputy commissioner for services and enforcement, said this week that he hopes Congress will pass extenders as soon as possible to give the agency enough time to make the necessary systems changes for the tax filing season.
The NAM has long been pushing Congress to act ASAP to renew the expired tax provisions since the absence of the R&D tax credit, enhanced Section 179 expensing, bonus depreciation and other important tax incentives are having a negative impact right now. Without these incentives in place and without a clear view of when and for how long they will be renewed, manufacturers cannot incorporate new investments into their future business plans. Since investments translate into production and expansion, every day that goes by without these incentives in place is a missed opportunity for growth in manufacturing and in turn, the U.S. economy.
The House has already acted to make permanent several pro-manufacturing tax provisions typically found in the extenders package, but the Senate has not yet passed their extenders bill, the EXPIRE Act. Earlier this year, the NAM joined over 150 organizations in writing to Senators in support of the bill, and continues to meet with Congress to urge that the expired tax provisions be reinstated as soon as possible. After all, eight months is far too long for the U.S. to be sitting on the sidelines while our global competitors continue to incentivize productive business investments.
While most Americans see the start of the New Year as a time for positive changes, many manufacturers considered January 1, 2014 a day that marked the continuation of an alarming trend – Congress once again allowed the R&D tax credit and other important tax provisions to expire.
Unfortunately, this is repeat of what happened at the end of 2011 when the R&D credit and over fifty tax provisions usually considered in an “extenders” package lapsed and were not reinstated until the fiscal cliff deal retroactively extended the package until the end of last year. The fact that Congress decided to adjourn at the end of 2013 without addressing the expiring tax provisions signals that while lawmakers may feel these provisions matter, they have placed less emphasis on the timing of when they are extended – a significant problem for manufacturers.
The expiration and retroactive extension of the R&D credit spurs volatility in manufacturers’ earnings. A recent Bloomberg article captures this problem, citing that many companies’ Q4 2012 earnings were lower because of the expired tax credit, but then saw a one-time boost in earnings in Q1 2013 after the retroactive reinstatement where five quarters of the tax benefits were claimed. This is a headache for manufacturers and investors alike, as tax rates and earnings may change significantly by quarter or year.
Manufacturers claim the most R&D credit amounts out of any industrial sector and account for the lion’s share of private-sector research and development. Allowing the credit to repeatedly expire creates unnecessary uncertainty for American businesses investing in R&D and serves as a roadblock on the path to innovation.
The NAM urges Congress to include an enhanced R&D incentive as a permanent part of the tax code to boost U.S. investment in R&D, create high-wage jobs, and spur economic growth. Absent action on a permanent incentive this year, the R&D Credit must be seamlessly extended as soon as possible.
Members of Congress and the Administration seem to agree on what manufacturers have long known: enhancing investment in research and development, or R&D, drives economic growth. But that growth cannot be sustained without a permanent R&D incentive.
The uncertainty of an on-again, off-again tax credit upends the innovation, new product development and job creation that manufacturers contribute to the economy. When there is no telling whether the incentive would be around for the entire length of a manufacturer’s R&D project, investment in the U.S. manufacturing base suffers. A JP Morgan Chase report released in August found that private spending on R&D slowed to 2.4 percent in 2013. We cannot allow investment to tumble any further. With the credit set to expire for the sixteenth time at the end of the year, that outcome becomes increasingly possible.
That’s why the NAM is advocating a permanent and strengthened R&D incentive as one of our priorities for comprehensive, pro-growth tax reform. The United States has been a leader in promoting R&D for over 30 years, but more and more countries have provided greater certainty for businesses in recent years by enacting permanent—and more generous—R&D incentives. A strong and permanent R&D credit will allow the United States to remain competitive in the global race for R&D investment dollars, particularly as manufacturers are courted by other countries with more generous and more stable R&D tax incentives and lower corporate tax rates.
The certainty provided by a strengthened, permanent R&D incentive would enhance its incentive value and help ensure the United States’ leadership in global innovation.
Christina Crooks is the director of tax policy for the National Association of Manufacturers.
The testimony of Texas Instruments’ (TI) CEO, Richard Templeton at the House Science and Technology Committee 2/6 hearing on “American Competitiveness: The Role of Research and Development,” endorsed key principles of NAM’s Innovation Policy Agenda with laser precision. His support of STEM (science, technology, engineering and mathematics) education; reversing the growing skills gap in the United State; boosting underfunded federal, basic research spending; fixing the high skilled immigration system; and providing robust, competitive R&D tax incentives are all smart policies that will drive future innovation and job growth in our country.
Templeton got it right about the role research plays in advancing America’s competitiveness: “…federal funding of fundamental scientific research is critical to our nation’s continued competitiveness, economic growth and workforce development” as basic research is the key to unlocking future innovation in the United States. This is important because innovation has a proven track record in helping manufacturers companies to grow. Manufacturers lead all industries in innovation investments, accounting for 70 percent of all private sector research and development spending. This investment results in new product development, increased productivity, and job creation, not to mention the societal spillover benefits that improve our country’s standard of living.
Other countries recognize the exponential value of being home to world class innovation and have enacted attractive innovation policies to lure future R&D activity outside the United States. Templeton’s testimony gives credence to this global competition by citing a disturbing trend — OECD (Organization for Economic Cooperation and Development) data showing a decline in the U.S. share of global R&D as a percent of GDP from 39 percent to 34 percent from 1999-2010. He cites other stark statistics such as our current skills gap that “…for every unemployed person in the United States, there are two STEM job postings,” which should be a wakeup call for policymakers.
The NAM joins Mr. Templeton in urging lawmakers to enact smart policies that will reverse this trend and drive future innovation in the United States. A first step would be to avert the across-the- board spending cuts from the sequester set to occur March 1. These arbitrary cuts will foolishly cut federal funding of basic research programs and STEM education. An op-ed coauthored by Mr. Templeton appearing 2/6 in Politico sums up the expected negative impact on innovation from sequestration: “…there will be a significant, long-term irreparable price to pay if the U.S. government slashes its support for science and engineering and for those who pursue those fields.”
Doesn’t this impending sequester of federal programs that spur innovation reflect the old adage “penny wise, pound foolish”? These imprudent budget cuts if allowed to occur will be a direct hit at future innovation and economic growth that will reverberate for years to come.
NAM applauds Mr. Templeton’s voice for pro-innovation policy that will result in unleashing future American innovation and create a 21st century workforce to meet the needs of manufacturing. Lawmakers would be prudent to act on his recommendations.
Once again a number of important tax incentives are scheduled to expire on December 31st, clearing the way for a tax increase on millions of U.S. taxpayers that benefit from these provisions. Manufacturers have an interest in a number of these provisions including the Controlled Foreign Corporation (CFC) look through rules, deferral for active financing, and the R&D tax credit that help us create and retain jobs and compete in the global marketplace.
Because of the importance of these and other provisions to the business community, the NAM today joined more than 1,500 other companies and organizations on a letter to all members of Congress urging them to act quickly to extend these pro-growth, pro-job provisions.
While many in Congress focus on much-needed tax reform, the letter makes a strong case for why these “extenders” can’t wait until negotiators agree on how to revamp the tax code.
“The lack of timely congressional action to extend these provisions would inject more instability and uncertainty into the economy and further weaken confidence in the employment marketplace… Even though Congress has begun to consider tax reform proposals, a wide-ranging group of taxpayers is making decisions right now related to current law which will have an immediate impact on the economy.”
Plain and simple, “tax extenders” mean jobs and competitiveness for the U.S. economy It’s something that we can ill-afford to wait for in these unsettled economic times.
The U.S. R&D tax credit, a proven tool for spurring innovation and creating jobs, has a bittersweet 30th anniversary on August 13. Bittersweet because the credit, the best R&D incentive in the world in the mid-1980s, is one of the weakest today.
This negative trend is bad for manufacturers and the economy, especially now that other countries aggressively court American manufacturers to move their domestic research by offering better and often permanent R&D tax incentives. (To learn more about what other countries are offering, read this Deloitte survey of R&D tax incentives around the world.)
These countries have discovered the multiple spillover and societal benefits, like a higher standard of living, associated with the innovations derived from research. For sure, there has been a steady increase in the migration of domestic research offshore–the U.S. share of global R&D has dropped from 39 to 33 percent in less than a decade as more nations have entered the race to attract R&D dollars.
The credit’s power to spur innovation and create jobs hasn’t been helped by its history of lapses and retroactive extensions. Since its enactment in 1981, the credit has expired 14 times, including a one-year lapse in the mid-1990s that was never reversed—and the credit is set to expire once again at the end of this year. The uncertainty caused by these stop-and-go credit extensions has had a damaging impact on companies’ future R&D budgets because companies cannot rely on the credit to exist for the duration of a research project, which typically spans 5 to 10 years for manufacturers.
R&D fuels innovations and technological advances that drive new product development and increased productivity—key factors necessary for growth in the manufacturing sector. Many lawmakers are voicing repeated interest in creating a pro-manufacturing climate in the United States. Now they can turn their words into action, specifically through enactment of H.R. 942, bipartisan legislation that would strengthen the alternative simplified research credit rate to 20 percent from its current 14 percent, and make it permanent. There is a long history of bipartisan, bicameral congressional support as well as presidential support for a strengthened, permanent R&D tax credit. Future anniversaries of the credit would be sweeter if the U.S. R&D tax credit’s incentive value is restored to a position of global leadership.
For more information about the R&D credit, visit the website of the R&D Credit Coalition.
The Department of Treasury on Friday released a new report, “Investing in U.S. Competitiveness: The Benefits of Enhancing the Research and Experimentation (R&E) Tax Credit,” with the full .pdf available here.
The report, developed to support the Obama Administration’s promotion of a permanent and stronger R&D tax credit, reaffirms the credit’s value to the U.S. economy, especially the manufacturing sector. In 2008, manufacturers claimed $5.78 billion worth of tax credits, or 69.3 percent of the total. The top three manufacturing sectors claiming the credit were:
- Computer and electronic product manufacturing: 31.5 percent of the total claimed.
- Chemical manufacturing: 25.9%
- Transportation equipment manufacturing: 20.5%
The Administration proposes:
- Making the R&E Credit Permanent. The President proposed in his FY 2012 Budget to permanently extend the R&E credit so that businesses can make investments in research projects, confident that they can benefit from the credit in the future. The President has placed a high priority on making the credit permanent, proposing this in his previous two budgets as well.
- Increasing the Alternative Simplified Credit Rate by More than 20 Percent. While the President has previously proposed making the R&E credit permanent, the Administration now also proposes to increase the rate of the alternative simplified credit from 14 percent to 17 percent. This will provide a larger incentive to increase research and simplify the credit by encouraging firms to switch to the alternative simplified tax credit base. The Administration’s proposal maintains the current regular research credit to prevent disruption to firms that choose to continue claiming the regular research credit.
Secretary Geithner gave brief remarks Friday that mentioned the tax credit when he visited NanoMech, a nanotech-products manufacturer in Northwestern Arkansas.
- Arkansas Business Online, “Timothy GeithnerTouts Tax Credit During Springdale Stop”
- Reuters, “Geithner says Japan won’t harm U.S. recovery“
- NWAOnline.com, “Geithner Tours NanoMech in Springdale“
- NWAOnline.com, “U.S. to swell tax credit to spur research“