The Effects of the Temporary R&D Tax Credit on the United States

Now that the R&D Tax Credit has been extended for the 16th time since its creation in 1981, advocates are realizing  how the lack of permanence is weakening the effect of the credit’s incentive and ultimately crippling the United States’ chances of staying a top competitor in the field of innovation.

In 2012, the United States was placed 27th out of 42 national policies rated by the Information Technology and Innovation Foundation, a Washington D.C. think tank. Many feel that the temporary nature of the tax credit is what is causing the U.S. to keep falling farther behind other nations.

The temporariness of the tax code creates uncertainty for U.S. companies conducting larger R&D projects that will more than likely last longer than a year. If companies are not certain they will receive the credit over the expected life of the R&D project, they are less likely to spend the extra money on the research budget. This uncertainty is repressing R&D investment within the country by causing companies to spend less money on innovation than they would if the credit were permanent.

So what is stopping Congress from making the R&D credit permanent? You guessed it… money. Analysts believe that making the credit permanent would cost the government $100 billion to $150 billion in tax revenue over the next ten years, making it less than a priority on Congress’ long to-do list.

But after a 34 year-long relationship, companies are ready for the government to stop playing hard to get and commit, and who’s to blame them. The smaller startup companies are major supporters of a more permanent and simpler credit. Most of these companies serve as hubs for innovation, but the current tax code makes it difficult for them to claim the credit because they lack the large research budget.

Earlier this year, Democratic Senator Tom Carper (Delaware) made huge strides in the fight for a more stable relationship  with the House passage of the COMPETE Act which should give Congress the necessary push in the right direction. Here’s to hoping.

If you are interested in claiming the federal or Texas R&D tax credit, contact a Texas R&D Tax Credit Solutions tax professional for expert advice.

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