On Thursday, May 8, 2014, the House will consider H.R. 4438, the American Research and Competitiveness Act of 2014, under a closed rule. H.R. 4388 was introduced on April 9, 2014 by Rep. Kevin Brady (R-TX) and referred to the House Committee on Ways and Means, which ordered the bill reported by a vote of 22-12.
H.R. 4438 establishes a permanent simplified formula for calculating the research tax credit. The tax credit is equal to the sum of: 1) 20 percent of qualified research expenses for the taxable year that exceeds 50 percent of the average qualified research expenses for the three preceding tax years; 2) 20 percent of basic research payments for the taxable year that exceed 50 percent of average research payments for the three preceding tax years; and 3) 20 percent of all expenses (without regard to a base amount) paid to an energy-research consortium for research conducted for the taxpayer. Moreover, this legislation continues the rule that allows taxpayers to claim a reduced research credit if the taxpayer has no qualified research expenses over the three preceding tax years, and increases this credit from six percent to ten percent. H.R. 4438 would repeal the traditional research tax credit effective for tax years beginning after 2013. This legislation would be effective for amounts paid and incurred after the 2013 tax year.
The research tax credit was enacted in the tax code as a temporary provision in the Economic Recovery Tax Act of 1981 in order to address the decline in private sector R&D spending that began in the 1960s. Though only a temporary measure, the credit has been extended 15 times. After a one-year lapse in 2012, Congress retroactively extended the research credit through 2013 in the American Taxpayer Relief Act of 2012.
Prior to its expiration at the end of 2013, the research tax credit had three components. First, the credit allowed a taxpayer to “claim a research credit equal to 20 percent of the amount by which the taxpayer’s qualified research expenses for a taxable year exceed its base amount for that year.” In general, the credit was available for incremental increases in qualified research. In lieu of the standard 20 percent credit, taxpayers could claim an alternative simplified research credit (ASC) equal to “14 percent of qualified research expenses that exceed 50 percent of the average qualified research expenses for the three preceding taxable years.” If a taxpayer did not have any qualified research expenses in any one of the three preceding taxable years, that rate was reduced to six percent. Taxpayers could also claim a 20 percent research tax credit for amounts paid (over a base amount) for basic research conducted by universities and certain nonprofit scientific research organizations (more commonly known as the basic research tax credit). Finally, taxpayers could claim a 20-percent credit for all expenditures (without regard to a base amount) paid for research undertaken by an energy research consortium.
Despite the research tax credit having been extended 15 times since its enactment, it still remains a temporary measure. In some years (including 2012) the credit has expired, leaving uncertainty for innovators and reducing the credit’s effectiveness as an incentive. Implementing a simplified and permanent research tax credit will not only provide certainty to investors in research, but will reduce the administrative burden for taxpayers and the IRS. Using an ASC formula eliminates the need for calculating a historic base-period credit, simplifying documentation and reporting procedures for taxpayers.
Gary Guenther, Research Tax Credit: Current Law and Policy Issues for the 113th Congress, Congressional Research Service (May 2, 2014), p. 11.
Id. at 18.
Id. at 14.
 See House Report 113-431, p. 4.
See Id. at 5-6.
See Id. at 6.
See Id. at 5.
See Id. at 5.
The Joint Committee on Taxation (JCT) estimates that enacting H.R. 4438 would reduce revenues by approximately $155.5 billion over the 2014-2024 period.
For questions or further information contact the GOP Conference at 5-5107.