On May 20th, the US House of Representatives passed HR 880, making the Research & Development Tax Credit permanent. The House bill is called the American Research and Competitiveness Bill of 2015.
HR 880 provides no revenue offsets which will likely be met with a presidential veto, consistent with what President Obama has promised to do in the past. However, without a Democratic majority in the Senate, it’s difficult to predict what the President will do in this instance. Republicans and Democrats have long battled over how to fund these credits. Democrats argue that they must be paid for by either closing tax loopholes or raising taxes. Republicans argue that the tax credits lead to more investment in R&D, resulting in more innovation, leading to more profits, and thus more tax revenue to Congress.
KBKG Insight: The President and congressional Democrats have also proposed making the credit permanent and increasing the ASC percentage. The President’s FY2016 budget called for an increase of the ASC rate to 17%.
HR 880 repeals the regular credit calculation method and makes the alternative simplified credit (ASC) method permanent. It increases the ASC credit rate from 14% to 20% for companies with qualified research expenses in the three years preceding the credit year and increases the ASC credit rate from 6% to 10% for companies without the expenses in the previous three years.
HR 880 makes both the basic research credit and the energy research credit permanent as well, changing the base period for the basic research credit to a rolling average of the three prior years, rather than employing a fixed base period (currently used). It also allows the credit to offset both regular and alternative minimum tax for eligible small businesses, as defined in IRC § 38(c)(5)(c).
HR 880 is estimated to cost $180 billion over the next ten years and would be effective for tax years beginning after December 31, 2014.
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