Bipartisan Legislation Would Significantly Enhance the U.S. Research and Experimentation Tax Credit

U.S. Senator Chris Coons (D-Del.), leader of the Senate’s Manufacturing Jobs for America initiative, and Senator Pat Roberts (R-Kan.) introduced bipartisan legislation on January 14th to enhance incentives for private firms to invest in research and development within the United States and its possessions (e.g., Puerto Rico and Guam). The Innovators Job Creation Act would help startups and other small companies take full advantage of the Research and Experimentation Tax Credit (hereinafter “RTC”) pursuant to I.R.C. § 41 that are currently unavailable to them based upon the current statute.

“Research and development is the lifeblood of great American companies, turning ideas into innovations that grow businesses and create good manufacturing jobs here at home,” U.S. Senator Chris Coons (D-Del.) said. “If we want to strengthen our manufacturing sector, we have to support innovation and entrepreneurship, particularly by startups that are creating the majority of new jobs. The Innovators Job Creation Act will make the successful research tax credit accessible to thousands of small firms, freeing up the capital they need to grow during their critical early stages. We can win the fight for manufacturing jobs in America if we invest in our nation’s inventors and innovators, and that’s exactly what this bipartisan bill does.”

“Research and development in new technologies and new products is an important source of economic growth,” Senator Pat Roberts (R-Kan.) said. “The new technologies, products, and lower prices generated by investments in research and development create new jobs, raise wages, and create new demand for goods and services. Our legislation would increase cash flow for small businesses and start-ups involved in research and development intensive activities by reducing past, current and future tax liabilities leading to permanent tax savings. This would also reduce a company’s effective tax rate, increasing cash flow and improving earnings, which results in them becoming a more attractive investment.”

Typically, start-ups must invest in research and experimentation for many years before they can design, develop and release their new product line to even attempt to become profitable. During this “pre-revenue” phase of their development start-ups generally cannot use the tax incentives generated by their research and development investments. As a result, start-ups need to raise a great deal of outside capital to fund their investments in new technologies and products, and normally face significant complications in connection to borrowing as well.

To address this, the Innovators Job Creation Act would:

• Allow the RTC to be claimed against the Alternative Minimum Tax (hereinafter “AMT”). Even if a company is entitled to a RTC, many pass-through entities cannot claim it because the RTC cannot be used against the AMT. Eight out of 10 businesses that would otherwise benefit from taking the RTC will receive little to no benefit because of the AMT. This provision was previously in the Small Business Jobs Act of 2010, but expired after just one year.

• Permit the Alternative Simplified Credit (hereinafter “ASC”) on Amended Tax Returns. Currently, businesses can only claim the “Regular” RTC under “Section A of Form 6765” on an amended tax return. However, the “Regular” RTC requires substantiation of a company’s Fixed-Base Percentage (hereinafter “FBP”) which often times is very labor intensive to document, arduous and onerous. Additionally, the FBP is normally the focal point of highly contentious Internal Revenue Service examinations. The ASC was intended to make the methodology easier, but regulations prohibit its use on an amended tax return.

• Enable Startup Firms to Claim the RTC, by claiming it against their Employment Taxes. If a startup company cannot claim the RTC because it does not have an income tax liability, it can claim the RTC against taxes it pays on employee wages. The benefit is capped at $250,000 per year.

I will continue to provide legislative updates from the Hill as they become publicly available and the Innovators Job Creation Act can be downloaded via the subsequent link:

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About the Author
Peter J. Scalise serves as the National Partner-in-Charge of the Federal Tax Credits and Incentives Practice at SAX CPAs LLP. Peter is a highly distinguished member of the Accounting Today Top 100 Influencers and has approximately thirty years of progressive Big 4 and Top 100 public accounting firm experience developing, managing, and leading large scale tax advisory practices on a regional, national, and global level.
Peter also serves as a passionate philanthropist and a member of several Boards of Directors and Boards of Advisors for local, regional, and national charities in connection with poverty and hunger alleviation; economic development; environmental conservation; health and social services; supporting veteran and military service personnel along with preserving arts and cultural programs.

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