H.R. 880, American Research and Competitiveness Act of 2015

H.R. 880

American Research and Competitiveness Act of 2015

Committee
Ways and Means

Date
May 20, 2015 (114th Congress, 1st Session)

Staff Contact
John Huston

Floor Situation

On Wednesday, May 20, 2015, the House will consider H.R. 880, the American Research and Competitiveness Act of 2015, under a closed rule.  H.R. 880 was introduced on February 11, 2015, by Rep. Kevin Brady (R-TX) and was referred to the Committee on Ways and Means, which ordered the bill reported, as amended, by a vote of 23 to 12 on February 12, 2015.

Bill Summary

H.R. 880 establishes a permanent simplified formula for calculating both the basic research tax credit and the energy research tax credit with a rate of 20 percent, replacing the current short-term research tax credit calculation method. Under current law, a taxpayer may claim either the traditional (regular) credit, which is 20 percent of incremental expenses above a base period, which was established in the 1980s, or the alternative simplified credit (ASC), which is 14 percent of incremental expenses using a three-year rolling average. The bill would repeal the traditional credit, make the ASC credit permanent, and would increase the ASC from 14 percent to 20 percent. Because the ASC is no longer the “alternative” credit it would no longer be called the “ASC”, rather it would become the research tax credit.

Additionally, the bill allows qualified small businesses, defined as those businesses with $50 million or less in gross receipts, to claim these tax credits against Alternative Minimum Tax (AMT)[1] liability. H.R. 880 would be effective for qualifying amounts paid and incurred after December 31, 2014.

Under the bill, the new permanent research tax credit would be equal to the sum of: 1) 20 percent of qualified research expenses (QREs) above 50 percent of a company’s average annual QREs in the past three years; 2) 20 percent of its basic research payments to a qualified organization for basic research done under a written contract above 50 percent of the company’s average annual basic research payments in the past three tax years; and 3) 20 percent of the company’s payments to an energy research consortium for energy research in the current tax year. If a company had no QRE expenditures in any of the previous three years, the credit would be equal to 10 percent of their QREs for that year.

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[1] According to the IRS, “individuals with a higher income may be subject to the Alternative Minimum Tax. Under the tax law, certain tax benefits can significantly reduce a taxpayer’s regular tax amount. The AMT sets a limit on those benefits. If the tax benefits would reduce total tax below the AMT limit, the taxpayer must pay the higher Alternative Minimum Tax amount.”

Background

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 research and development spending that began in the 1960s.[2]  Though only a temporary measure, the credit has been extended 16 times.[3] After a one-year lapse in 2012, Congress retroactively extended the research credit through 2013 in the American Taxpayer Relief Act of 2012.[4]

Under current law, there are four distinct tax credits: (1) a regular credit, (2) an alternative simplified credit (ASC), (3) a basic research credit, and (4) an energy research credit, which are all non-refundable. In any tax year, taxpayers may claim no more than the basic and energy research credits, plus either the regular credit or the ASC. To prevent taxpayers from benefiting twice from the same expenditures, any research tax credit claimed must be subtracted from deductible research expenses.[5]

For general research expenditures, a taxpayer may 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. Thus, the research credit is generally available with respect to incremental increases in qualified research expenses. An ASC (with a 14-percent rate and a different base amount) may be claimed in lieu of this credit.[6]

A 20 percent research tax credit is also available with respect to the excess of (1) 100 percent of corporate cash expenses (including grants or contributions) paid for basic research conducted by universities (and certain nonprofit scientific research organizations) over (2) the sum of (a) the greater of two minimum basic research floors plus (b) an amount reflecting any decrease in non-research giving to universities by the corporation as compared to such giving during a fixed-base period, as adjusted for inflation. This separate credit computation commonly is referred to as the basic research credit.[7]

Additionally, a research credit is available for a taxpayer’s expenditures on research undertaken by an energy research consortium. This separate credit computation commonly is referred to as the energy research credit. Unlike the other research credits, the energy research credit applies to all qualified expenditures, not just those in excess of a base amount. All of the aforementioned research credits expire for amounts paid or incurred after December 31, 2014.[8]

Despite the research tax credit having been extended 16 times since its enactment, it still remains a temporary measure.  In some years (including in 2012) the credit has expired, leaving uncertainty for innovators and reducing the credit’s effectiveness as an incentive. Many taxpayers report that the general research credit can be complicated to calculate and that the base period is difficult to determine.[9] Implementing a simplified and permanent research tax credit will help provide certainty to investors in research and will help 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.

H.R. 880 is similar to H.R. 4438, which passed the House by a by a vote of 274 to 131 on May 9, 2014. The Senate did not act on the House-passed bill in the 113th Congress.

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[2] See CRS Report—Research Tax Credit: Current Law and Policy Issues for the 114th Congress at 3.
[3] Id. at 19.
[4] Id. at 14.
[5] See CRS Report—Research Tax Credit: Current Law and Policy Issues for the 114th Congress at 3.
[6] See House Report 114-113 at 5.
[7] Id.
[8] Id.
[9] Id. at 8.

Cost

The Joint Committee on Taxation estimates that enacting H.R. 880 would reduce revenues by about $182 billion over the 2015 to 2025 period.

Additional Information

For questions or further information please contact John Huston with the House Republican Policy Committee by email or at 6-5539.