research and development tax credit Archives - Shopfloor

Historic Tax Extenders Agreement Provides Certainty, Bridge to Tax Reform

By | Economy, Shopfloor Policy, Taxation | No Comments

Since it was first enacted in 1981, the research and development tax credit has never been a permanent part of the tax code. Instead, the temporary nature of the credit — a characteristic shared by more than fifty other “tax extenders” — has injected uncertainty into business planning for years since it is constantly expiring and often not extended until months later. The good news is that this on-again, off-again debacle could finally be alleviated for good, if Congress approves a historic tax agreement called the Protecting Americans from Tax Hikes (PATH Act).
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House Taxwriters Move Forward on Tax Reform Part I

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Kudos to House Ways and Means Committee members who today approved several bills that will revive, make permanent and—in some cases—improve several expired tax provisions that are high priorities for manufacturers.

The individual bills call for a permanent and robust R&D credit, provide first-year expensing for capital investments by small manufacturers, allow manufacturers to defer tax on active financing income earned overseas and let U.S. multinationals redeploy cash overseas without triggering an additional U.S. tax burden. Taken together these bills will stimulate innovation, create more jobs, spur investment and make U.S. manufacturers more competitive—all factors that are critical to our nation’s economic growth.

In an April 28th letter to Committee members in advance of the hearing, the NAM pointed out that legislative action to make permanent these important tax provisions represents a significant step forward in achieving our goal of pro-growth, pro-manufacturing tax reform. Here at the NAM we’re committed to both ending the continuing cycle of temporary tax provisions and advancing much-needed comprehensive tax reform. Today Ways and Means members added a strong voice to these critical provisions and demonstrated their commitment to pro-growth tax policy. Thanks to Chairman Camp and his Committee for getting the ball rolling towards these goals.

Just What the Doctor Ordered

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Last Friday President of the Federal Reserve Bank of Minneapolis Narayana Kocherlokata (Ph.D.), noted in a speech that, “the future course of the U.S. economy is not predetermined by the events of the past seven years. Both history and theory have the same lesson: It is possible to undo what might now appear to be permanent changes.” The way that he proposes to do this is by reducing he suggests is by, “reducing the tax rate on the process of transforming current goods into future goods. In practice, the government can accomplish such a reduction in a relatively targeted fashion by allowing businesses to completely expense any investments into equipment, structures, or R&D.” Doing so, “leads to a higher rate of capital accumulation, which stimulates future economic activity by lowering the future costs of production,” something all manufacturers agree is critical.

This particularly timely prescription for economic recovery comes just days after two bills were introduced to make two critical, pro-investment incentives permanent, H.R. 4457, by Reps. Tiberi (R-OH) and Kind (D-WI) to permanently extend increased Section 179 expensing and H.R. 4438 to simplify and make permanent the research credit introduced by Reps. Brady (R-TX) and Larson (D-CT. These bills are just what the Ph.D. ordered.

The NAM has long supported the extension of enhanced Section 179 expensing and the bill introduced by Reps. Tiberi and Kind would take this one step further and make this important pro-growth, pro-investment incentive permanent. The expiration of the enhanced Section 179 at the end of 2013 has put investment decisions on hold for many small and medium sized manufacturers who do not know what tax provisions may be in place by the end of this year. H.R. 4457 would raise the cap for Section 179 expensing from $25,000 where it is today to $500,000 with a $2 million phase out. Making this provision a permanent part of the tax code will help these manufacturers invest and compete but it will also help those manufacturers whose customers rely on enhanced Section 179 to help defray the tax cost of their investment.

Likewise, the R&D tax credit is a proven incentive for spurring private-sector investment in R&D and creating domestic, high-wage R&D jobs, as 70% of credit dollars are used to pay the salaries of high-skilled R&D workers. For manufacturers, R&D fuels innovation that translates into new product development and increased productivity—two key factors necessary for growth in manufacturing. Unfortunately, the credit has never been a permanent part of the tax code since it was first enacted in 1981, and Congress recently allowed the R&D Credit to expire on December 31, 2013, creating unnecessary uncertainty for American manufacturers. The NAM supports the strengthened, permanent R&D credit provided in H.R. 4438, which will enhance the credit’s incentive value and increase U.S. competiveness in the global race for R&D investment dollars.

So while not full expensing, by seeking to make these important policies permanent, these two measures would go a long way towards injecting some certainty and growth into our still lagging economy and would be actions manufacturers would certainly applaud.

Carolyn Lee is Senior Director of Tax Policy for the National Association of Manufacturers.

Christina Crooks is Director of Tax Policy for the National Association of Manufacturers.

A Bittersweet Anniversary for the U.S. Research and Development (R&D) Tax Credit

By | General, Innovation, Taxation | One Comment

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.

Make R&D Tax Credit Permanent, Even in Revamped Tax Code

By | General, Innovation, Taxation | One Comment

Bloomberg, “Treasury Department Supports Permanent Research Tax Break Even in Overhaul,” reporting on Treasury’s support for a more robust, permanent R&D Tax Credit as part of a revamped tax code.

Michael Mundaca, assistant Treasury secretary for tax policy, said that the economic benefits and high-wage jobs generated by the research credit make it worth preserving, even in a tax system with fewer targeted tax incentives.

“In a reformed system, you’d still want some incentives to be provided for research activity, and we think this is a good incentive to provide,” Mark Mazur, the department’s chief tax economist, said at a briefing with reporters in Washington yesterday.

The briefing accompanied the advance release of a new report, as reported by Reuters, “Obama tax credit will support 1 mln workers-report.”

Treasury Secretary Geithner will highlight the jobs connection when he visits a high-tech manufacturer in Northwest Arkansas today. From ArkansasBusiness.com, “NanoMech Ready for Appointment with Geithner“:

NanoMech Inc. chairman and CEO Jim Phillips grasps firmly the significance of U.S. Treasury Secretary Tim Geithner’s Friday visit to northwest Arkansas.

“He could’ve gone to the Silicon Valley, he could’ve gone to the Research Triangle,” Phillips said Thursday morning, “but he’s coming here.”

Geithner’s visit is multi-pronged. He will meet with a group of regional business leaders at the Arkansas World Trade Center and also is expected to address the release of a report detailing the economic benefits of President Obama’s Fiscal Year 2012 Budget proposal to enhance the Research & Experimentation tax credit.

NanoMech anticipates Secretary Geithner’s visit in a news release, “U.S. Treasury Secretary Timothy Geithner Makes Historic Visit to NanoMech Plant in Springdale.”

Senate Approves Tax Package by 81-19 Vote

By | Economy, Small Business, Taxation | One Comment

The vote on H.R. 4853 (or more precisely, the motion to concur in the House amendment to the Senate amendment with Amdt. No. 4753 to H.R. 4853) was 81-19 in support. The margin of victory should provide momentum for passage as the House takes up the bill Thursday.

This is good legislation, a compromise with many more plusses than minuses in terms of jobs and economic growth. As the National Association of Manufacturers’ “Key Vote” letter in support of the bill summarized:

Manufacturers strongly support extending the 2001/03 tax relief to all Americans. Over 70 percent of U.S. manufacturers file as S-corporations or other pass-through entities; most would be significantly and adversely impacted by the higher tax rates that will take effect without congressional action. The non-partisan Congressional Budget Office estimates that fully extending the 2001/03 rates would add between 600,000 and 1.4 million jobs in 2011 and between 900,000 and 2.7 million jobs in 2012. Moreover, lower tax rates on capital gains and dividends will boost capital investment and economic growth.

The NAM has consistently called for repeal or significant reform of the estate tax. For small and medium-sized manufacturers (SMMs), business owners and families, the estate tax is more than a one-time tax. In a 2009 survey of our SMM members, respondents said they spent, on average, $94,000 annually on fees and estate-planning costs in preparation for their estate tax bill. This is money that could have been used to grow businesses and add jobs.

Renewal of the research and development (R&D) credit and other business extenders is critical to manufacturing competitiveness and should be extended. Manufacturers claim nearly 70 percent of the R&D credit, and R&D fuels innovation that translates into new products, increased productivity and jobs. Similarly, extension of deferral for active financing and the look-through rules will help U.S. competitiveness. Other extenders promote energy efficiency and make permanent important employer-provided education assistance. Moreover, the 100-percent expensing provision will create a positive ripple effect in the economy by encouraging investment and creating demand for machinery and equipment.

Update: From The Business Journals, “U.S. Senate approves Obama tax-cut deal“:

“The bill is a good first step to eliminate much of the uncertainty that has been holding back investment and job creation by manufacturers and the broader business community,” said Jay Timmons, executive vice president of the National Association of Manufacturers.

Rep. Lee (R-NY): Innovation, Manufacturers Need R&D Tax Credit

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Rep. Christopher Lee (R-NY) speaks from his experience as a manufacturer in this excellent column in today’s Politico,U.S. may risk losing race for R&D incentives,” to call for the retroactive extension of the Research and Development Tax Credit.

Before I ran for Congress in 2008, I helped run a business in Western New York. We manufactured motion control components — including motors, actuators, vibration isolators and industrial shock absorbers. Our products are used in the Tomahawk cruise missile, in medical equipment, on rail cars (including the subway system in the Capitol building) and in aircraft.

This gave me experience with the daily challenges U.S. manufacturers face to stay on the cutting edge, create jobs and compete successfully against global competitors. Research and development on innovative new products is critical. It’s no surprise, then, that manufacturers perform half of all R&D in the U.S., according to the National Association of Manufacturers.

So our economic recovery and the future of U.S. manufacturing depend on firms having the right incentives to make vital investments in R&D.

The NAM has prepared a ManuFact fact sheet on the credit, “R&D Tax Credit: Keep Manufacturers Competitive in the Global Race for R&D Investment Dollars.”

Sen. Baucus Introduces Tax Extenders Bill

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From the Senate Finance Committee, chaired by Sen. Max Baucus (D-MT), “Baucus Introduces Bill to Create Jobs and Extend Family, Worker, Employer Tax Cuts”:

Washington, DC – Senate Finance Committee Chairman Max Baucus (D?Mont.) today introduced fully paid-for legislation to create jobs and extend critical tax cuts for individuals, families and employers, while closing tax loopholes for wealthy investment fund managers and large corporations. The bill would cut taxes for families paying college tuition, state and local taxes, and property taxes. It would cut taxes for employers to spur research and development and investment, freeing up cash to expand and hire new workers. And the legislation would bolster career training programs and provide wage assistance to help employers hire workers to help our economy grow.

The bill features many one-year extensions of current tax programs, exemptions, incentives and the like. For example, the R&D Tax Credit would be extended for one year,  retroactively from the start of 2010.

News coverage …

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Facing the Reality of Global Competition with an R&D Tax Credit

By | General, Infrastructure, Taxation, Technology | No Comments

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.”

Pro-Growth or Scattershot Stimulus

By | Infrastructure, Innovation, Taxation, Technology | No Comments

The editors of National Review Online analyze President Obama’s flurry of new spending and tax proposals and find them wanting. From the excellent editorial, “Scattershot Stimulus,” which does a good job of drawing distinctions on the worthy R&D tax credit that others gloss over, while still calling for an extension of the 2001 and 2003 tax cuts.

Obama also proposes to expand and make permanent a tax credit for research-and-development expenditures. This would be an improvement over the status quo, under which this tax credit has been “temporary” for government accounting purposes but consistently reauthorized since its creation in 1981. By itself, the policy isn’t objectionable, but it’s being offered in exchange for a worse overall tax climate: The administration has almost certainly oversold the benefits of expanding the credit, which would be small compared to the costs of raising tax rates in a weak economy. Increasing tax rates on income, dividends, and capital gains, even if those hikes were confined to the top two brackets, would weaken incentives for some of the country’s most productive individuals and profitable small businesses to work, invest, hire, and grow. A slightly bigger write-off for R&D isn’t sufficient to cushion that blow, and business owners know it.

And, the conclusion:

If this summer’s employment and housing numbers heralded the death of the latest Keynesian revival, then Obama’s latest raft of stimulus proposals indicates that he has reached the bargaining stage of grief. He is tacitly acknowledging that tax relief is the best medicine for an ailing economy, but he is trying to hold on to the idea that government still knows best where that relief should be “targeted,” and he’s asking for just $50 billion more in new spending in exchange. He still thinks we should let the Bush tax cuts expire, even as key senators in his party and his own former OMB director have abandoned that view. The sooner Obama gets over the denial stage, reaches the acceptance stage, and embraces a pro-growth tax policy, the sooner we’ll exit the depression stage and get on the road to recovery.