On March 15th 2012 Pennsylvania Lt. Governor Jim Cawley met with members of the Pittsburgh Technology Council to discuss the important role that  investments in research and development have in growing Pennsylvania’s manufacturing and technology sectors. They also took the opportunity to  emphasize just how beneficial Governor Corbett’s 300% increase in the Pennsylvania R&D tax credit has been since it was adopted last year.

“According to a report issued earlier this week, in 2011, a record number of Pennsylvania businesses were awarded R&D tax credits. This falls on the heels of last year’s state budget which expanded the available pool of credits from $18 million in 2010 to $55 million in 2011. The 537 businesses that benefited from the credit, reported more than $4.1 billion in expenditures on research and development activities in the Commonwealth, which represents a $624 million increase in expenditures over the prior year or a 17.6 percent expansion.

Last year’s state budget also dramatically increased the small business set-aside for R&D credits from $3.6 million to $11 million, which enabled small businesses to receive 100 percent of the credits for which they applied. In 2010, and prior to the Corbett administration’s changes, just $3.6 million of the $8.5 million in applications submitted by small businesses were funded.

The Pittsburgh Technology Council has played a leading role in promoting the state’s R&D tax credit and in generating important changes to the program over the past decade, including a 2003 law that created the opportunity for start-up businesses to sell unused credits to other PA businesses, and a 2006 reform that doubled the credit for small businesses. Since those changes were enacted, the number of small businesses benefiting from the credit increased from 79 businesses in 2003 to 217 in 2011.” – Tech Burgher

Another association joins the fight to keep the R&D tax credit alive. This time, it’s the Aerospace Industries Association (AIA) representing many of the nation’s leading manufacturers and suppliers of aerospace materials and technology. In a recent publication they explain the impact the lapse of the R&D program continues to have on their industry.

“Congress has provided a Research and Development Tax Credit to provide an incentive for companies to perform R&D in the United States. For more than thirty years, this has been an important counterbalance to the tax policies of other nations, which often provide greater tax incentives than the United States offers. This credit has been instrumental in stimulating the amount of innovation financed and maintained in the United States by the private sector. Unfortunately, over the past few years the R&D tax credit has become a hostage to the larger political battles in Washington over tax policy…

The R&D tax credit has just expired at the same time aerospace and defense companies are absorbing reductions in federal R&D and procurement spending. In many parts of the industry, aerospace workers are being laid off as a result of federal cutbacks. Renewing the law and making credit retroactive at some point in the future will not help American aerospace workers keep their jobs today…

Both through the R&D Credit Coalition and independently, AIA is continuing to push Congress to extend the R&D Tax Credit as soon as possible. As part of this effort, AIA has placed a letter on our Second to None website (www.secondtonone.org) where aerospace and defense employees can express their views directly to Congress on this critical issue.” – AIA-Aerospace.org

Many State R&D programs are undergoing increases as a part of an effort to attract and retain business within each respective state. One such example is the recent Alaska R&D tax credit that passed the State House. The R&D tax credit is not only being established in states devoid of R&D credit programs, but also increasing in states where it already exists. One such example is Maryland.

“Maryland is a leader in research and development. Next week two key committees will hear legislation to increase the maximum amount of R&D credits that may be granted annually from $6 million to $18 million, and allow a refundable credit for small businesses.

The Maryland Chamber supports this legislation, HB 943, sponsored by Del. Kumar Barve (D-Dist. 17), and SB 570, sponsored by Sen. Nancy King (D-Dist 39) and a bi-partisan group of senators. “Increasing the amount of funding allowed for the R&D tax credit would help to promote high tech job creation in Maryland,” Maryland Chamber Vice President of Government Affairs Ron Wineholt said.

The current cap of $6 million has not been increased since the program was created in 2000, while Pennsylvania has more than tripled its program funding to $55 million. This bill would provide a more meaningful incentive with increased funding.” – Chamber Action Network

Dow Chemical Co. is challenging the IRS regarding R&D tax credits, pleading that the credit should cover costs of supplies used to improve the ways existing products are made. If Dow is successful, the scope of the tax credit could become quite broad. According to Reuters:

Oral arguments are set for Thursday at the 2nd U.S. Circuit Court of Appeals in New York in a case that pits Union Carbide, a wholly owned subsidiary of Dow (DOW.N), against the IRS.

A win for Dow would widen the scope of the R&D credit – a mainstay of the corporate tax code that costs U.S. taxpayers roughly $7 billion a year – at a time when corporate tax breaks, in general, are under scrutiny in Washington.

As lawmakers grapple with the enormous U.S. budget deficit and a tax code riddled with loopholes, the R&D credit continues to enjoy broad political support, but it has critics.

Far from being just about lab coats and microscopes, the credit today is part of the economic mainstream. It can be claimed by all sorts of companies, from chicken farmers and fast-food packagers to brewers and wineries, according to the many tax consulting shops that promote it to the private sector.

Since its creation in 1981, the credit has helped support basic research. But detractors say it has become a costly corporate hand-out, too broadly claimed, that does little to further the goal of driving more U.S. R&D hiring and investment.

Dow is arguing that traditional manufacturers with older but popular products – it produces ethylene, a basic chemical used to make plastics – deserve the credit just as much as high-tech companies creating the next big cellphone or cancer drug.

The IRS is arguing, according to court documents, that to allow the R&D credit to be claimed as Dow wants ‘would transform the research credit into a manufacturing subsidy.’

Dow disputes this, arguing that availability of the R&D credit ‘should not hinge on whether a product or process improvement is the desired outcome,’ Dow spokesman Greg Baldwin said. ‘This distinction is not supported by the Internal Revenue Code, applicable Treasury regulations or legislative history.’”- Reuters

Earlier this week Senator Pat Roberts (R-Kan) put forth a piece of legislation to extend the expired tax credits such as the Research and Experimentation Credit in exchange for freezing the salaries of federal employees for another year. This was not met with enthusiasm by all, and the bill was ultimately rejected by the Senate. However, Roberts believes (along with others) that:

“…this amendment is an important first step in growing our economy…It contains many, but not all, of the critical tax relief provisions that should be extended to protect families and businesses from higher taxes. Until we reform the Tax Code, Congress should extend expired tax provisions.” – AccountingToday

Although the bill was rejected, this should be no indicator of what is to come. The reality is that while the R&D tax credit was not extended under this bill, as federal employee’s salaries were at stake, it will likely be extended or even made permanent in the near future, if history is any indication.

This is an interesting perspective on one point being made by R&D opposition…

Recently there was yet another plug for a permanent and strengthened R&D Credit, this time from the Washington Post. In a 2/25 editorial “A Chance for Corporate Tax Reform,” the paper applauded the President for including a permanent and strengthened R&D credit in his tax reform framework. As the Post aptly notes, “[P]rivate-sector underinvestment in R&D is a market failure requiring government correction.” On this point, the National Association of Manufacturers says bravo!

More than 30 years of an on again, off again R&D tax credit, is no way to spur cutting-edge technologies and world class innovation in the United States. And this is particularly true today when the credit has expired for the 15th time. It’s no surprise that the U.S. share of global R&D in this century has fallen from 39 percent to 31 percent given the fierce global competition for R&D investment dollars. Once the best in the world during the 1980s, our R&D tax credit today ranks 24 as countries around the globe have created stronger R&D tax incentives to attract the fuel of innovation: R&D. Our global competitors get it. It is not just the economic growth derived from new innovations that makes a country want to be the world’s incubator for the newest innovations, but also the societal spillover benefits and the higher standard of living associated with such innovations.

What manufacturers, who perform nearly 70% of all business R&D in our country know, is that research is inherently risky, costly, and time consuming and a typical R&D project in the manufacturing sector spans five to 10 years. The United States needs more R&D and the tax code can help. – Shopfloor

Alaska State House passed a bill today to instate a Research & Development Tax Credit for qualified research expenses for companies operating within the state. According to CBS News:

HB118 was introduced at Gov. Sean Parnell’s request. It would provide credits of up to $10 million a year per applicant for qualified research and development projects. The idea was to stimulate new private investment to help diversify Alaska’s economy, which is heavily reliant on oil.

Supporters called the bill important to attracting innovators and testing technologies that could benefit Alaska in Alaska. Critics said there were too many unanswered questions and that the bill amounted to a blank check.

However…

Rep. Charisse Millett, R-Anchorage, encouraged lawmakers to “think big,” and shake off pessimistic thoughts. She said there are untold possibilities for research that could help Alaska, particularly in the realm of renewable energy, and said Alaska should not demonize those who want to do business here.
- CBS NEWS

At this point it is unclear how the bill will be received, but the intention of key politicians in the state is clear: provide material incentives to bring more production and economic diversity to the state.

Although there is much debate surrounding the renewal of the Federal R&D tax credit, another piece of law swept by unnoticed: case law.  Although the IRS clearly requires the documentation and substantiation of Qualified Research Expenditures (QREs), Bayer Corporation decided to challenge the code, stating that it is unduly burdensome to cite each QRE and that they should be allowed to take statistical sampling from each facility to qualify. The District Court for PA court ruled in favor of the IRS, and the code is upheld. This displays not only the scrutiny with which qualification for r&d tax credits are assessed, but just how necessary it is to use a seasoned tax credit consultant to qualify r&d tax credits.

View the case here

According to a recent National Center for Policy Analysis (NCPA) Report , the U.S. is falling behind in an area in which they were once the leaders.

“While the U.S. continues to put policy bandaids on R&D tax credits, other countries are racing past us,” said study coauthor and NCPA Sr. Fellow Pamela Villarreal.  “Fifteen years ago, the U.S. led the way with the most generous tax credit of any nation.  Now, France tops that list with a 42.5 cent effective tax credit for every dollar of R&D spending. The U.S. allows a pitiful tax credit of six cents.”

“No fewer than three major developing countries and 14 developed countries are barreling forward to attract and support new research, and they’re winning” said Villarreal. “The credit in the U.S. has not even been renewed yet for 2012, creating more uncertainty for firms…Increasing the alternative simplified research and development tax credit, combined with the regular research credit under current law, would increase R&D spending by $23 billion to $53 billion, according to the NCPA report.”
- Green Mountain Scribes

For NCPA report PDF click here

For NCPA article click here

The Motor & Equipment Manufacturers Association (MEMA) supports the renewal of the research and development tax credit. They are joined by manufacturing heavyweights such as Automotive Aftermarket Suppliers Association (AASA), Heavy Duty Manufacturers Association (HDMA), Original Equipment Suppliers Association (OESA), and Motor & Equipment Remanufacturers Association (MERA) in taking the position that:

“MEMA supports extension of the R&D tax credit and a robust discussion of ways to
improve the credit’s use. Making the credit simpler to use and increasing the benefits will
do much to advance innovation in the motor vehicle parts industry and allow
manufacturers to better compete in the global market.” – MEMA.ORG