Blog post by Geoff Garber
Another year has come and gone and Congress is finally making strides towards passing a comprehensive tax extenders package. As in years past, tax extenders are used as political bargaining chips and are inevitably avoided until the zero hour. Some of the noteworthy tax provisions on the extension docket include the Research and Development (R&D) Tax Credit, Section 179D Energy Efficient Commercial Building Deduction, Section 45L, and Bonus Depreciation. Senator Orrin Hatch proposed significant, long-needed changes to the R&D Tax Credit that the Senate Finance Committee approved earlier this year. Additionally, Texas Representative Kevin Brady has proposed fallback legislation that would extend certain tax breaks for two years in the event that the two sides cannot agree to make certain extenders permanent. With Congress set to go on vacation December 18, any legislation would need to be sent to the President for signature before that date or be delayed until Congress reconvenes in early January 2016.
R&D Tax Credit
The R&D Tax Credit has been extended 16 times, most recently through December 31, 2014, and has bipartisan support from both Republicans and Democrats in Congress. Currently, there are a handful of bills circulating in Congress that all aim to extend the R&D Tax Credit, each of which provides a different approach.
H.R. 34 – Tax Increase Prevention and Real Estate Investment Act of 2015
Last week, Texas Representative Kevin Brady offered H.R. 34 as an amendment to a Senate amendment of the bill. The legislation extends and modifies the R&D tax credit along with about 50 other tax breaks for a period of two years. The bill simplifies the R&D tax credit and provides assistance to small businesses that oftentimes are unable to utilize the benefit. Here are a few highlights:
- Eliminates the complicated regular credit calculation in favor of an increased (14% to 20%) alternative simplified credit (ASC)
- Increases the ASC from 6% to 10% for companies with no Qualifying Research Expenses (QREs) in prior 3 years
- Allows small businesses (privately held company with <$50 million AGR prior 3 years) to offset both the regular and alternative minimum tax (AMT) liabilities
The measure has support from both Republicans and Democrats and there is hope that Congress will pass the measure before the end of this week. The amendment is currently listed as the only item that may be considered this week outside of suspension of the rules. If negotiations on broader changes fail to make certain extensions permanent, this could very well be the bill considered and passed.
H.R. 880 – American Research and Competitiveness Act of 2015
Representative Brady also introduced H.R. 880, or the American Research and Competitiveness Act of 2015, on February 11, 2015 and saw it pass the House on May 20. The bill aims to make the Section 41 R&D Tax Credit permanent once and for all, allowing businesses to effectively plan their tax strategies and not have to deal with the uncertainty inherent in tax extender legislation. H.R. 880 also includes language similar to H.R. 34 regarding ASC percentage increase, regular credit elimination, and AMT turnoff for small businesses.
S. 1946 – Tax Relief Extension Act of 2015
Utah Senior Senator Orrin Hatch introduced S. 1946, also known as the Tax Relief Extension Act of 2015, on August 5, 2015. The legislation seeks to extend a number of tax provisions, most notably the R&D tax credit, for a period of 2 years through December 31, 2016. The bill would amend Section 41 to allow small businesses with gross receipts under $5 million to offset payroll tax, while also allowing privately held companies with an AGR under $50 million to offset the alternative minimum tax. The measures would significantly expand the current pool of taxpayers who can utilize R&D tax credits, as many taxpayers are forced to carryforward credits due to lack of utilization. The tax extender portion of the bill is similar in many ways to the H.R. 34 amendment previously mentioned.
Summary – R&D Tax Credit Legislation
The various bills currently circulating in Congress affect the R&D tax credit in different ways. The good news is that each bill addresses at least one important aspect of the credit that has been needed for some time, whether that is permanence, increased taxpayer utilization, or overall simplification. Hopefully, the House and Senate can work together to pass at least one extender bill before going on vacation at the end of this week.
|Bill||Permanent?||ASC to 20%||AMT offset for small businesses||Payroll tax offset for small businesses||Small business definition|
|H.R. 34||No||Yes||Yes||No||<$50 million AGR prior 3 yrs|
|H.R. 880||Yes||Yes||Yes||No||<$50 million AGR prior 3 yrs|
|S. 1946||No||No||Yes||Yes||AMT: <$50 million AGR prior 3 yrs
Payroll: <$5 million GR, no GR 5 years prior