PERMANENT EXTENSION OF THE R&D TAX CREDIT

Approved by the IEEE-USA
Board of Directors (11 Nov. 2005)

IEEE-USA supports permanent extension of the Research and Experimentation Tax Credit (also known as the R&D Tax Credit).

Research and development is a vital component of this country’s economic engine, and a key to U.S. global leadership in science and technology. Similarly, the tax credit is an essential incentive for companies to help mitigate the risk of investing in research that may not be realized in profitable products for many years to come, but will ultimately make the United States more competitive in the emerging global market. By providing an incentive for expanding private-sector investments in technology, the R&D Tax Credit improves productivity and encourages technological innovations that help sustain U.S. competitiveness, create jobs, and ensure our national security.

To provide an effective incentive to the private sector for expanding R&D investments, it is critical that the R&D tax credit be made permanent, so that it can be factored into business planning on a consistent and predictable basis. The current R&D tax has been extended at least eleven times since first enacted in 1981. But the uncertainty created by these short-term extensions discourages companies from investing in critical, long-term, high-risk research projects that have historically shown tremendous payoffs in economic growth, productivity gains and jobs.

The increasingly competitive nature of the emerging global economy mandates that the United States take proactive measures, such as a permanent R&D tax credit, to ensure a strong domestic science and technology research and development base. In that competitive global environment, other nations utilize tax incentives to encourage business R&D spending. According to the Organization for Economic Cooperation and Development (OECD) Science, Technology and Industry (STI) Outlook 2004, 18 countries currently employ tax incentives to promote research and development. Competing countries are also using R&D incentives to lure businesses to relocate there. For example, Canada has instituted a 20 percent flat credit for R&D expenditures, and China’s Challenge 2008 has the explicit goal of “adopting vigorous measures to encourage businesses and academics to increase research, development and innovation, while introducing research and development (R&D) resources from overseas.”

This statement was developed by IEEE-USA's Research and Development Policy Committee and represents the considered judgment of a group of U.S. IEEE members with expertise in the subject field. IEEE-USA is an organizational unit of the Institute of Electrical and Electronics Engineers, Inc., created in 1973 to advance the public good and promote the careers and public policy interests of the more than 220,000 electrical, electronics, and computer engineers who are U.S. members of the IEEE. The positions taken by IEEE-USA do not necessarily reflect the views of IEEE or its other organizational units.

BACKGROUND

The Research and Experimentation Tax Credit (Internal Revenue Code, Section 41) was created in 1981, and it has been extended by Congress 11 times since enactment. As originally enacted, the credit was equal to 25 percent of a company’s incremental “qualified R&D expenditures” (QREs), in excess of a base equal to the average qualified expenditures for the previous three years. By limiting the credit to incremental increases in R&D expenditures, Congress sought to provide an incentive for increased R&D expenditures, rather than a subsidy for expenditures that might have taken place in the absence of the credit.

QREs generally include salaries and wages, supplies and 65 percent of the total amount paid for contract research. Basic research payments to universities and certain other research organizations are also treated as QREs. Expenditures that do not qualify include property, plant and equipment costs, and depreciation on R&D capital goods. While not well defined under Section 41, qualified research must be technological in nature, and also relate to the development of new or improved business components. Generally, roughly 50 percent of industry R&D expenditures are determined to be QREs.

In 1986, the R&D tax credit was reduced to 20 percent. In 1989, the computation of the base amount was modified to link it to gross receipts. In 1996, Congress added an Alternative Incremental Research Credit (AIRC) to provide an incentive to companies that made substantial expenditures in R&D, but were unable to qualify for the regular credit due to rapidly increasing gross receipts. So, Congress lowered the rates for the AIRC from those originally proposed to meet revenue constraints.

Because almost 70 percent of R&D tax credit dollars claimed are for the salaries of research employees, the credit benefits engineers and scientists directly by fostering high-skilled, high-wage jobs in the United States. At a time when U.S. companies are increasingly looking to develop products for foreign markets offshore, the R&D tax credit encourages companies to keep a greater portion of R&D, and the related jobs, in the United States.

A number of studies have shown that the R&D Tax Credit stimulates additional research in excess of federal tax revenues forgone, and that the tax credit has been beneficial to companies of all sizes and across all sectors. Industries that particularly benefit include electrical and electronic equipment, communications, chemicals and allied products, biotechnology, machinery, motor vehicles and equipment, instruments and related products, and business services.

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Last Update: 28 Nov. 2005
Staff Contact: Bill Williams