President Obama Proposes Making the R&D (R&E) Tax Credit Permanent
by Karim Solanji, J.D., Director and Mark Lauber, VP of Marketing, Paradigm Partners
In an effort to spur innovation and stimulate an increase of jobs in the US, President Obama has included the cost of making the R&D (R&E) Tax Credit permanent in his budget proposal for Fiscal Year 2010.
Currently the credit needs to be approved and extended yearly. In fact, in late October 2008, the R&D Tax Credit was approved retroactively for 2008 and extended through 2009 as part of the Emergency Economic Stabilization Act of 2008.
Background about the R&D Tax Credit
The Research and Development (R&D) tax credit was created by Congress as part of the Economic Recovery Tax Act of 1981 to encourage American industry to invest in research and development activities. The purpose of the credit was to stimulate R&D activities among businesses through tax incentives. However, due to the stringent requirements that existed under the provisions of the Credit, a vast majority of the small to mid-size companies were unable to reap the substantial benefits of the R&D credit.
Changes Enable SMBs to Benefit from R&D Tax Credit
Realizing that a majority of innovation in the U.S. was in fact transpiring from these small to mid-size firms, Congress in 2001 liberalized the statutory requirements to enable small and mid-size companies (SMBs) across the country to take advantage of the R&D benefits.
Specifically, the new regulations provided that companies were no longer required to maintain precise timesheets documenting every hour an employee spent conducting qualified R&D activities. Furthermore, the research no longer had to result in a product that was new to the industry; instead, the resulting product or process simply had to be new to the company that developed it.
These changes substantially increased the number of companies taking the credit. Additionally, for those companies that had not taken the credit, they can go back 3 open tax years and receive a refund from the IRS.
The following industries have benefited from taking the R&D Tax Credit:
• Software Development
• Tool and Die Machine Shops
• Food Sciences & Agro-Business
Examples of Benefits
Here are a few examples of companies and their Net R&D Tax Credit:
1) Tool & Die Shop
a. Average 4 year payroll of $3.5 Million
b. Net Credit Benefit for 2004 thru 2007 tax years: $200,000
2) Foam Products Manufacturer
a. Average 4 Year Payroll of $19.5 Million
b. Net Credit Benefit for 2004 thru 2007 tax years: $1,200,000
3) Software Company
a. Average 4 Year Payroll of $6.5 Million
b. Net Credit Benefit for 2004 thru 2007 tax years: $500,000
4) Custom Plastics Products Manufacturer
a. Average 4 Year Payroll of $11.5 Million
b. Net Credit Benefit for 2004 thru 2007 tax years: $700,000
As you can see the R&D Tax Credit can be substantial for small and mid-size companies especially if you consider what revenue might be required to generate an equivalent profit.
How the Economy Will Benefit
It is very natural that the credit become permanent based on President Obama’s continued assertion that technical innovation is a way to create more jobs immediately and in the long term and also to allow us to compete globally.
In general the jobs that are created from these types of activities are high paying jobs and the workers will be here in the US.
How Can Your Company Benefit
For those companies already taking the credit, it will help in budgeting and planning their employee levels from year to year knowing that the credit will be available for the coming year.
For those companies that have not taken the credit, this is an opportunity to get a cash refund from the IRS for overpaying taxes the 3 previous years. It does not matter if you are going to be profitable this year or not, you can still take advantage of the incentive if you were profitable and paying taxes in the 3 previous years. And if you are profitable this year, you take a dollar for dollar reduction in your current year tax liability.
The 2010 budget needs to be approved by April 15 so our hope is that it will be passed and include making the R&D Tax Credit permanent. This incentive will help increase employment in the short and long term with high paying American jobs and help companies that have not taken the credit receive a well needed cash refund from the IRS to invest in improving or expanding their business during these tough economic times.
About the Authors:
The authors are Karim Solanji, J.D., a Director with Paradigm Partners and Mark Lauber, VP of Marketing at Paradigm Partners. Paradigm Partners is a national tax consulting firm specializing in the R&D Tax Credit. Mark's email is [email protected] and his phone number is (281) 558-7100 X-105. Our website is www.ParadigmLP.com.