Long Live the R&E Tax Credit

One of the few pro-business components of Bush's tax plan is a review of the tax credit for research and experimentation.
Lisa YoonFebruary 22, 2001

The recent economic boom owed as much to the leaps and bounds in technological innovation as it did to the leadership of President Clinton and Federal Reserve chairman Alan Greenspan. Now that the economy has taken a more sluggish turn, business is asking the government for incentives to keep innovation progressing. President Bush’s answer is a tax proposal that includes a plan to bring about a permanent extension of the tax credit for research and experimentation (R&E).

Currently, the on-again, off-again R&E tax credit is set to expire in 2004. Under the Clinton administration, the decision was final. But Bush’s tax proposal calls for a reexamination of the issue that could result in making the credit permanent. If passed, it would also simplify the eligibility requirements, which many say are overly complex.

The tax credit would provide annual benefits to companies of around $5 billion by 2010, According to the Congressional Joint Committee on Taxation.

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.

Companies and industry experts are cheering the President’s move. “We really appreciate that the Bush administration plans to review the regulation,” says Monica McGuire, senior policy director of taxation at the National Association of Manufacturers. McGuire says the tax credit plays a significant role in encouraging growth and putting people to work. Last year, two-thirds of growth in manufacturing came from R&D, she notes. “Most of the credit dollars, about 75 percent, are used for the salaries of people doing research and development,” McGuire adds.

The R&E tax credit is especially valuable to smaller firms. Burlington, Mass.-based Lightbridge Inc., which provides customer relationship management services to telecom carriers, projects that the tax credit represents as much as one to two cents of future annual earnings-per- share. “It makes a difference for us in terms of our investments,” according to CFO Harlan Plumley. “It’s not that we wouldn’t do something if the credit wasn’t there, but we might not do it as fast, or we’d probably stagger the implementation of some of our technology purchases just because it helps reduce our costs.”

Another major issue with the current R&E regulation, in addition to its approaching expiration date, is the complexity of the qualification requirements. Companies must provide extensive documentation that the research to which they intend to apply the credit is not just part of the continued cost of doing business. (The credit only applies to “new” R&E.) The reporting requirements make companies’ eligibility more confusing and add to the administrative burden of applying for the credit.

“The existing requirements have been significantly burdensome from an administrative standpoint,” says David Anderson, CFO of manufacturing conglomerate ITT Industries. The review of the current requirements could “bring clarity to an overly complex process,” he says. “We’ve had a lot of tax and legal professional support which could be eased [under the proposed version.]”

Since the examination of the tax credit is tied to Bush’s controversial tax cut, it is still uncertain whether it will pass or not. Democrats have become more vocal in their opposition of the plan. But proponents expect some measure of tax reform to pass, one that would likely include the R&E credit review, one of a only a few pro-business tax proposals in the plan.

Federal administrations have threatened to cut the R&E tax credit almost annually only to extend it temporarily for a few more years. Business would like to see a permanent decision, if only so they can plan better. “It’s a question of making R&D more cost effective,” says Plumley of Lightbridge. “Would we still hire those computer programmers? Would we still buy that Sun server? Sure. Would we do it today? We might, but we might also delay it a little bit.”