R&D Tax Credit Expires

Congress has allowed the research and development tax credit to expire, even though it appeared initially that lawmakers were set to renew it before recessing for the holidays.

“It was a huge disappointment and that’s a fairly vast understatement,” said Bartlett Cleland, senior director of tax policy for the ITAA (Information Technology Association of America). “We’ve been in this situation before where Congress retroactively [approves the R&D extension] and shoots the heck out of tax planning. This really mucks things up.”

The R&D tax credit extension was part of a package of 13 tax breaks for individuals and 18 for businesses included in a bill approved by the House Nov. 9. However, the Senate stripped those provisions out the Temporary Tax Relief Act of 2007 on Dec. 19, the day before recessing. It expired Dec. 31.

The final version of the Temporary Tax Relief Act of 2007 was called the “Tax Increase Prevention Act of 2007.”

Renewing lapsed tax credits are nothing new in Washington. For the R&D tax credit, it is the 13th time in the 25-year history of the credit that Congress has allowed it to expire. Lawmakers have always, although sometimes belatedly, renewed the credit.

“BSA is disappointed that the R&D tax credit expired. U.S. competitiveness is inextricably linked to innovation, which, in turn, is linked to robust investment in research and development,” said Diane Smiroldo, vice president of public affairs for the Business Software Alliance.

“This critical tax credit fosters competitiveness and will spur the continued development of cutting-edge products and processes that consumers have come to expect and demand.”

When Congress originally passed the R&D tax credit in 1981, the United States put into place one of the most attractive R&D tax incentive programs in the world. Since then, as Congress approved one extension after another, global competitors have passed more generous incentives in hopes of luring U.S. companies. The United States now ranks 17th of the 30 countries in the Organization for Economic Co-operation and Development in offering R&D tax credits.

“We will continue to work with congressional leaders to extend the R&D tax credit and remain optimistic that the extension will happen soon,” Smiroldo said.

The tech industry would like to see the R&D tax credit, which covers 20 percent of qualified R&D spending, made permanent. “It should be rewritten for the knowledge economy,” Cleland said. “It’s one of the few pieces that really help.”

The industry’s call for a permanent extension of the R&D tax credit has become an annual event on Capitol Hill, but at a Dec. 5 press conference, Sen. Orrin Hatch, R-Utah, said not to expect a “miracle” from Congress.

“It would be ridiculous to have a permanent tax increase for a temporary R&D tax credit,” Hatch said. “We have to fight for it every year.”

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