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R&D Tax Grants to Benefit Engineering
December 13, 2006 |Estimated reading time: 2 minutes
WASHINGTON D.C. The U.S. Congress passed an extension to the R&D tax credit in the closing days of a "lame duck" session. Members of the House and Senate approved extending the credit, which expired at the close of 2005, but did not make it permanent. The law provides a research tax credit equal to 20% of the "amount by which a taxpayer's qualified research expenses for a taxable year exceed its base amount for that year," according to the Finance Committee's summary of legislation. Congress will review related legislation when the new session convenes in 2007.
The provision extends the research credit for qualified amounts paid or incurred in 2006 and 2007, and enhances the credit for portions of tax years in 2007, in part through a new alternative simplified credit that does not use a gross-receipts factor. The estimated cost is $16.3 billion over five years, a substantial rise from the $7.1 billion predicted in the tax relief legislation of 2005.
The "Agenda for American Competitiveness," authored by Senator Max Baucus (D-Montana), notes that American universities and research institutes do a large share of the innovative research in the world. But over the last 20 years, federal research funding in the physical sciences and engineering has "declined by nearly one-third as a share of the economy," and China's research efforts have increased; many companies are relocating R&D closer to manufacturing in China. With secure support for R&D, the report argues, companies will bolster domestic economies, stay in the country, and benefit society as a whole through discoveries.
According to the NY Times, the stopgap tax measure passed the House at a 367-45 vote because it included the generally sought provisions of the R&D credit, and other deductions for school teachers and families of college students. Industry organizations such as IEEE call for a permanent credit, but note the difficulty of obtaining bipartisan support for a tax bill. The National Association of Manufacturers, which also supports a permanent credit program for R&D, called the legislation a "seamless extension." The R&D Competitiveness Act of 2006, part of the "Agenda for American Competitiveness" put forth by the 2005 Finance Committee of the U.S. Congress, states that Congress aims to "make permanent the research and development tax credit... simplify and improve the existing R&D tax credit," and provide means for capital to go to research parks and "new markets" start-ups. However, the 2005 R&D tax credit expired at the onset of 2006, and until the extension granted this December, no changes were accomplished.
Details of the amendments approved by Congress may be found in section 104 of the H.R.4388 Bill on Tax, Trade, Health, and other Provisions.