SICA Credits Encourage Jobs and Innovation

A new tax proposal could make it easier for smaller companies to thrive and the economy to get a much needed boost.
Dean Zerbe and Dhaval JadavJune 3, 2013

Lawmakers in Washington may not see eye to eye on much these days, but outside of Washington most individuals as well as CFOs and other senior executives would agree that the U.S. economy needs to create more jobs.

Fortunately, a bipartisan proposal has emerged that would go a long way toward achieving that goal by making the successful Research and Development tax credit available for the first time to innovative startup companies.

Drive Business Strategy and Growth

Drive Business Strategy and Growth

Learn how NetSuite Financial Management allows you to quickly and easily model what-if scenarios and generate reports.

The Startup Innovation Credit Act of 2013 (SICA), introduced in Congress by Senator Chris Coons (D-DE) this January, is proof that the U.S. Congress has its share of good ideas even though recent opinion polls would suggest the public may not think so.

Research has shown that new jobs in the United States are created almost exclusively by young startup companies. Yet, like many items in the U.S. tax code, the R&D credit — the biggest tax benefit available to innovative businesses — is not geared toward helping startups.

That’s because the R&D credit can only be taken against a firm’s income tax liability. It’s rare for a business in its early years to generate the kind of profits that would result in an income tax liability. But these companies do pay other business taxes, which are a big part of their operating expenses.

Under SICA, young companies would be allowed to claim the R&D credit not only against income taxes, but also against other business taxes, including payroll taxes paid on each employee to fund social security and medicare. That could mean a huge chunk of change, and make all the difference in the world to a company struggling in its formative years to meet payroll, expand business and hire new workers.

The Research and Development tax credit enjoys strong backing in Congress. We have heard many speeches by Republicans and Democrats vowing their support for it because it encourages business innovation and growth.

In the current economic environment, many young companies find it difficult to gain access to credit. That makes it all the more important for Congress to extend the benefits of the R&D tax credit to those new entrepreneurs who are applying a great idea to create a startup business.

The R&D tax credit supports exactly the kind of job creating innovation our economy needs.  It’s not just a credit for basic science (lab coats and test tubes) but also for applied science (making a product better, manufacturing it greener, etc.). The small incremental steps — the reality of innovation and technological change — are what the R&D tax credit is all about.

Let’s not forget that better-performing startups are responsible for most of the net new job creation in the United States. Study after study has shown that to be the case. A study dating back to 2010, for example, by the Kaufman Foundation said years of data confirmed “startups aren’t everything when it comes to job growth. They’re the only thing.”

What better way to help innovative risk-taking startups take root and grow than by allowing them to take advantage of the R&D credit so they will have more money in their pockets to expand and  hire new workers. SICA would allow them to do just that.

Even though the proposal is new, the concept for helping start-ups has been around for awhile.  Several state houses have already seen the value of helping startups. Most notably Minnesota, New York, and Louisiana have enacted their own refundable R&D tax credits for startups.

It is perhaps because of this combination of supporting innovation and entrepreneurs, market-driven benefits, and limited costs that SICA has attracted strong support out of the gate from both Republicans and Democrats. In addition to Senator Coons, Senators Charles Schumer (D-NY), and Debbie Stabenow (D-MI), SICA has already garnered cosponsors on the other side of the aisle including Senators Roy Blunt (R-MO), Mike Enzi (R-WY), Jerry Moran (R-KS) and Marco Rubio (R-FL).

We have seen first-hand that these refundable credits make a difference in creating new jobs, expanding a business, or even helping an entrepreneur make the decision to start a business. The margins are so small and the belts so tight that even a tax credit of $30,000 to $50,000 can keep a business afloat.

The SICA proposal deserves support of lawmakers interested in creating more jobs in the U.S. economy. The $160 million annual cost of SICA to the Federal Treasury would account for just a tiny fraction of the $9 billion to $10 billion annual overall cost of the R&D tax credit.

Best of all, the federal government wouldn’t be deciding the winner and losers. The market and investors would be left to judge that. With the benefits being recognized in the monthly payroll charges, the R&D credit and SICA would provide immediate help to a young business. That’s much more efficient than waiting for months if not years for federal grants to be issued, committees to meet and the grind of Washington to play out.

As Washington continues to search for ways to create jobs, encourage innovation and grow the economy, SICA is a smart idea ready for action.

Dean Zerbe is the national managing director of alliantgroup, a business advisory on credits and incentives. Prior to joining alliantgroup, Zerbe was senior tax counsel to the U.S. Senate Committee on Finance.

Dhaval Jadav is the chief executive officer of alliantgroup. Prior to founding alliantgroup, Dhaval worked in M&A, at Deloitte & Touche and also at the Internal Revenue Service.