innovation is a major driving force in long-term economic growth, and research and
development (R&D) serves as the lifeblood of innovation. The federal government encourages
business R&D in a variety of ways, including a tax credit for a company’s
increases in spending on qualified research above a base amount.
This report describes the current status of the credit, summarizes its
legislative history, discusses policy issues it raises, and describes
legislation in the 112th Congress to modify or extend it. The report will
be updated as warranted by developments affecting the credit.
The research credit has never been a permanent provision of the federal tax
code and expired at the end of 2011. Since its enactment in mid-1981, the
credit has been extended 14 times and significantly modified five times.
While the credit is usually assumed to be a single credit, it actually
consists of four discrete credits: (1) a regular credit, (2) an alternative
simplified credit (ASC), (3) a basic research credit, and (4) an energy
research credit. A taxpayer may claim no more than either of the first two
and each of the other two, provided it meets the requirements for each.
In essence, the research credit attempts to boost business investment in basic
and applied research by reducing the tax price (or after-tax cost) of that
research. It is incremental in that the credit applies only to qualified
research spending above a base amount. As a result, the credit’s effectiveness
hinges on the sensitivity of the demand for qualified research to decreases in
its cost. It is unclear from available studies how sensitive that demand
While most analysts and lawmakers endorse the use of tax incentives to generate
increases in business R&D investment, some have some grave
reservations about the current credit. Critics contend the credit is not
as effective as it could be because of certain flaws in its design, such as a lack
of permanence, uneven and inadequate incentive effects, non-refundability, and
an unsettled definition of qualified research.
The 111th Congress made two changes in the credit. Under the American Recovery
and Reinvestment Act of 2009 (P.L. 111-5), it extended through 2009 a
provision that gave corporations the option (which first became available
in 2008) of claiming a limited refundable tax credit that year for unused
alternative minimum tax and research tax credits from tax years before
2006, instead of any bonus depreciation allowance they could take. And the Tax
Relief, Unemployment Compensation Reauthorization, and Job Creation Act of
2010 (P.L. 111-340) extended the credit through the end of 2011.
A number of bills to extend and modify the credit have been introduced in the
112th Congress. They indicate that support for a permanent extension and
enhancement of the credit remains as robust as ever. But the revenue cost
of doing so and disagreements over how to pay for it are proving to be
difficult obstacles for Congress to overcome.
President Obama proposes in his budget request for FY2013 that Congress
permanently extend the credit and increase the rate for the ASC from 14%
Document available via e-mail as a pdf file or in paper form.
To order, e-mail Penny
Hill Press or call us at 301-253-0881. Provide a Visa, MasterCard, American
Express, or Discover card number, expiration date, and name on the card.
Indicate whether you want e-mail or postal delivery. Phone orders are preferred
and receive priority processing.