On October 1 and 2, Tax Credit Advisors attended the 2014 Northeast Lean Conference in Springfield.
It was truly a pleasure to gather again with out friends at GBMP for their annual conference celebrating Lean Manufacturing and related process technology development. We saw some old friends and made some new ones. Maybe we’ll see you there next year? For information about upcoming GBMP events, please visit www.gbmp.org. Tell them Otto and Karen sent you!
If your business regularly files for research and development tax credits, you may already be aware that the federal credit expired yet again at the end of 2013. We at TCA anticipate that the federal credit will be renewed for 2015 and will also be extended retroactively for 2014, as has always happened in the past, despite the current gridlock and partisanship in Congress. Politicians on both sides of the aisle recognize that tax credits that encourage and reward technical development are crucial in helping American companies to keep pace with global innovation and competitiveness. In fact, political support for making the program permanent continues to grow.
Why do we need to expand the research and development tax credit program? The United Stated lost close to one-third of its manufacturing jobs from 2000 to 2011. In addition, investments by foreign companies looking to build offices or factories in America declined an average of six percent per year during that span. As a result, innovation-based competitiveness has sharply declined, leaving America ranked as forty-third in a list of forty-four nations for “rate of progress” in innovation. [1]
While these numbers may seem downright scary, it is widely recognized that a stronger and more permanent federal research credit program would make a significant difference. Since research and development tax credits were first implemented in 1981, each dollar of credit has led to at least one dollar of additional R&D spending. Essentially, the program pays for itself, and helps offer a strong incentive for US-based companies to continue funding innovation here, rather than sending such work off shore or forgoing technical development altogether. Improved support for these activities would spur greater levels of investment and innovation, leading to more and better jobs here at home.
Other countries offer similar incentives, and in comparison, the United States ranks only 27th in generosity of R&D incentive programs for domestic companies. In many cases, U.S. companies maximize their benefits at around 6.5% of Qualified Research Expenditures, far below incentives offered by some global competitors. For example, the Canadian research and development program offers 20 cents on the dollar for R&D conducted by larger companies inside of Canada, and 35 cents on the dollar for smaller start-ups (known in Canada as CCPCs, or Canadian Controlled Private Corporations). Moreover, the current U.S. program continues to expire every few years and therefore is not as reliable an incentive for prospective planning as a permanent program.
The hard-working people in our manufacturing and technology sectors deserve better. TCA continues to support an expanded federal tax credit program.
[1] “The Race America Must Win” by Robert Atkinson
As part of the “fiscal cliff” legislation passed in January, the federal Research Credit was extended through December 31, 2013. The bill also extended several other expiring provisions of the tax code. This is the 15th time that the Research and Development tax credit has been renewed since its inception in 1981.
President Barack Obama has stated that he wants to make the Research and Development tax credit permanent to allow firms to feel confident when making decisions to invest in domestic R&D in longer term planning. If successful, this proposed legislation would reduce uncertainty faced by firms engaged in technological development, allowing them to invest in experimentation without worrying that vital funding might evaporate. If you are interested in helping to ensure passage of this provision, please call or write to your elected representatives.
The United States Court of Appeals for the 5th Circuit issued a ruling on June 9, 2009 that directs a lower court to ease interpretation of IRS rules on research credit calculation, and particularly endorses the use of reasonable estimates when precise cost figures are not available. In USA v. McFerrin, the IRS claimed that a refund it had paid for a research credit claim should be returned because the claim was not sufficiently documented. Specifically, the Service was found to have used a very narrow interpretation of the applicable rules regarding the identification of eligible activities and their related expenses. The court disagreed with the IRS position and instructed the lower court to revisit the issue.
This is a significant taxpayer victory because recent pronouncements from IRS had led many companies that could potentially gain significant benefits from the Research Credit program to forego any claims, fearing an IRS audit. The new ruling clarifies the incentive nature of this program and will hopefully encourage many more companies to apply.
The complete decision can be found at docket number 08-20377, USA v. McFerrin.