The Joint Council on Taxation recommends the research and experimentation tax credit be permanently extended and increased.
Tax Committee Supports Permanently Extending the R&D Tax Credit — Again
A recent report from the Joint Committee on Taxation (JCT) concurred with the President’s February 2013 budget proposal request: to increase the research and experimentation tax credit (R&D credit) and to make it permanent.
The aim of the credit is to stimulate investment and innovation in manufacturing and process improvement, but the temporary nature of it has frustrated taxpayer attempts to create mechanisms to claim the credit. The current law is part of the Tax Relief Act of 2010, and expired on December 31, 2011.
“Both parties and the President agree that the tax credit is good for the United States, and the general sentiment is the credit will be reinstated,” says Steve Roark, a tax resource manager with CliftonLarsonAllen. “The only question is what form the next iteration will take.”
JCT report details
The JCT report recommended an increase of 3 percent, from 14 to 17, while the President’s proposed budget called for a 6 percent increase to 20 percent. The report also analyzed claims, which totaled $4.9 billion in 2009 and is expected to grow to $6.5 billion in 2013.
The JCT report provides insight into the types and sizes of businesses that have made claims. For example in 2008, more than 21,000 corporations (including both C and S corporations) claimed more than $8.7 billion of research tax credits.
As the table below indicates, a large number of small firms were able to claim the research tax credit. C corporations claimed $8.3 billion of these credits, while $168 million in research credits flowed through to C corporations from ownership interests in partnerships and other pass-through entities. By comparison, individuals claimed $463 million in credits on their individual tax returns in 2008. This $463 million includes credits that flowed through to individuals from pass-through entities such as partnerships and S corporations, as well those credits generated by sole proprietorships.
| Asset Size ($) | Percent of Firms Claiming Credit | Percent of Credit Claimed |
| 0 | 1.6 | 1.1 |
| 1 to 99,999 | 5.5 | 0.1 |
| 100,000 to 249,999 | 5.3 | 0.2 |
| 250,000 to 499,999 | 3.0 | 0.1 |
| 500,000 to 999,999 | 7.0 | 0.3 |
| 1,000,000 to 9,999,999 | 39.4 | 5.2 |
| 10,000,000 to 49,999,999 | 20.1 | 6.2 |
| 50,000,000 + | 18.0 | 86.9 |
Totals may not add to 100 percent due to rounding. Source: Joint Committee on Taxation staff calculations from Internal Revenue Service, Statistics of Income data.
Prospects for extension and increase
The credit has been allowed to expire 13 times, but has remained a significant incentive 30 of the past 31 years, so it is likely to be continued. “I would be surprised if they make it permanent,” Roark says “but it is expected to be extended again and left at its current rate.”
How we can help
The temporary nature of the credit has stymied taxpayer ability to make dedicated tracking systems and methods. CliftonLarsonAllen has deep experience helping businesses assess and properly claim the tax credit. Our resources can help you understand and claim the R&D credit.