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Here we go again! The on-again, off-again R&D tax credit is once again being debated in Congress. The House of Representatives, in May, passed a bill with a 274-145 vote permanently extending the credit. While the bill hasn't yet been addressed in the Senate, the U.S. Senate Finance Committee passed bipartisan legislation by a vote of 23-3 on July 21 to extend the credit as well as provide startup companies and small businesses greater access to it.

Clare Goldsberry

July 28, 2015

5 Min Read
R&D tax credits need permanence to provide certainty to moldmakers

Here we go again! The on-again, off-again R&D tax credit is once again being debated in Congress. The House of Representatives, in May, passed a bill with a 274-145 vote permanently extending the credit. While the bill hasn't yet been addressed in the Senate, the U.S. Senate Finance Committee passed bipartisan legislation by a vote of 23-3 on July 21 to extend the credit as well as provide startup companies and small businesses greater access to it. Congress has been extending the R&D tax credits "on a stop-and-go basis for almost 35 years," commented an article in The Hill, which is one of the primary problems with this program.

device-tax-400.jpgPaul Ryan (R-Wis.), a big supporter of the R&D tax credit, is quoted in The Hill, as saying "this is something we think ought to be a permanent feature of our tax code." And there are a lot of others who agree with that line of thinking.

Called the Innovators Job Creation Act, the Senate bill would help startups and other small companies take advantage of valuable R&D tax credits that are currently unavailable to them in certain instances. The legislation, led by U.S. senators Chris Coons (D-Del.), Pat Roberts (R-Kan.) and Chuck Schumer (D-N.Y.), now heads to the full Senate for consideration.

The bill is promising, according to Chad Paul, Senior Director, BDO USA, a tax and business consulting services company. "Last year the Senate came out with a similar bill that had a lot of the same provisions," Paul told PlasticsToday. "It's a great bill and stands a greater likelihood of passing than the House bill aiming to permanently extend the credit."

Paul explained that one of the biggest problems with the R&D tax credits is that it needs to be reauthorized every year or so. "There have been some efforts to make it permanent, and President Obama has in the past supported such efforts, although more recently he said he will veto any such attempts because there is no revenue offset and extending the credit without such offsets is estimated to increase the deficit to the tune of $188 billion or so," he said. "A permanent credit may be unlikely, but an impermanent one does put business taxpayers in a world of uncertainly and makes tax planning difficult."

Another problem is that the R&D tax credits can be used to offset only regular taxes. "R&D tax credits provide no current benefit for start-ups or small, family-owned, privately held companies in which the owners are paying the alternative minimum tax (AMT), which means the R&D tax credit doesn't count," said Paul. "Larger corporations and ultra-successful businesses that generate regular taxes often are able to get more benefit from the credit. AMT taxpayers have to wait until they're paying regular income tax before they can benefit."

For molders and moldmakers, the R&D tax credit program can become a hornet's nest of problems if they don't have a good tax accountant that understands the nuances of this program. Yet, as Paul points out, "the R&D tax credit offers a huge opportunity for moldmakers developing new products and manufacturing processes, because almost all work they do in the normal course of business meets the criteria for the R&D tax credit," said Paul, who is based in Wisconsin and has worked with the industry in that state. "The opportunities for them are as great as they are for high-tech and pharma companies. In some instances, we're able to include the cost of the mold as a prototype, so the result is they can have really large R&D tax credits."

However, Paul explained that if the owners pay the AMT they won't get much benefit unless they're in a state with R&D tax credits at the state level, in which case they can use the credits to offset the AMT. States that have an R&D tax credit include Wisconsin, and Minnesota. Iowa has a refundable R&D tax credit. Arizona does, as well, which is great for startups. "Those who have gross receipts less than $50 million will be able to use the credit to offset the AMT," he added. "This will help them reduce a burdensome tax on activities they perform on a day-to-day basis."

One new provision in the Senate version of the bill will allow the R&D credit to be claimed against the AMT. Another new provision will enable startup firms to claim the R&D credit by claiming it against their employment taxes, with this benefit capped at $250,000 per year.

Paul noted that according to IRS statistics from 2012, an estimated $10.8 billion in R&D tax credits were reported by corporations, with 61% claimed by manufacturers. However, because the rules for what qualifies are fairly technical and highly fact-sensitive, there remains a level of uncertainty about what qualifies and what doesn't. You need an accountant who knows the tax law in this specialized area to help, as there are some things that can trip up even sophisticated tax professionals," said Paul.

While Paul stated that there will certainly be action on the R&D tax credit this year, what it will look like is a bit uncertain. "Will it be closer to the Senate bill or closer to the status quo? I hope we see something closer to the Senate bill that has the two provisions that extend the ability for taxpayers to monetize the credits. I think it will truly help innovation in America."

About the Author(s)

Clare Goldsberry

Until she retired in September 2021, Clare Goldsberry reported on the plastics industry for more than 30 years. In addition to the 10,000+ articles she has written, by her own estimation, she is the author of several books, including The Business of Injection Molding: How to succeed as a custom molder and Purchasing Injection Molds: A buyers guide. Goldsberry is a member of the Plastics Pioneers Association. She reflected on her long career in "Time to Say Good-Bye."

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