Not since World War II have Republicans had this large of a majority in Congress. The results from the 2014 midterm election are a staggering blow to Democrats. Prior to the 2014 midterm election, the Democrats had control in the Senate (53 out of the 100 seats with 2 Independents that caucus with the Democrats), were the minority in the House of Representatives (199 out of 435 seats), and had control of the Executive branch with President Barack Obama’s victory in 2012.

The balance of power in Washington has shifted dramatically in one night. As of Thursday morning, the GOP has secured 52 seats in the Senate with three races still undecided and increased their lead in the House. Votes are still being tallied in the Alaskan Senate race where the Republicans are currently leading and there will be a December runoff in Louisiana with the projected results being bleak for Democrats. It appears the Democrats will retain the Senate seat in Virginia with those results also being fairly surprising as the results were much closer than anticipated. When all is said and done, Republicans could potentially hold 54 seats in the Senate. The unfinished races not withstanding, what is clear is that Republicans have gained control in both chambers of Congress.

So what does this mean for the 2014 tax extender legislation that will impact valuable tax credits and incentives like the Research and Development Tax Credits, Green Energy Credits under IRC 45L for residential housing, Green Energy Deductions under 179D, Bonus Depreciation, Accelerated Depreciation on Qualified Leasehold Improvements, and many other tax extenders that expired on December 31, 2013?

The end result remains unclear. What we know is that both Republicans and Democrats are in favor of some form of legislation to renew important incentives like the Research and Development Tax Credits.

  • In March, President Obama included a permanent research credit in his fiscal 2015 budget and also proposed increasing the Research and Development Tax Credit percentage from 14% to 17%.
  • In April, the Democratic controlled Senate passed the EXPIRE Act, which would extend the current credit for 2 years, added provisions allowing start-up companies to offset the credit against payroll taxes, and would have also allowed taxpayers to reduce AMT with credits. In May, the Republican controlled House passed H.R.4438 - American Research & Competitiveness Act of 2014 amending the Internal Revenue Code to establish the Research and Development Tax Credit as permanent while also increasing the Alternative Simplified Credit rate from its current rate of 14% to 20%.
  • In August, the Senate received The Competitiveness and Opportunity by Modernizing and Permanently Extending the Tax Credit for Experimentation (COMPETE) Act which would also make the Research and Development Tax Credit permanent and would increase the credit rate to 25% of qualifying research.

So if both Democrats and Republicans are believers in the merits of the credit, why has it not been extended? A permanent credit is projected to cost the Government between $100 billion and $150 billion over the next decade. Democrats insist on replacing that lost revenue with the closing of various tax “loopholes” in order to fund the Research and Development Tax Credits in line with the “pay-as-you-go” rules. Republicans have argued that the credit has been extended 15 times in the past and have taken a hard stance on offsetting the tax extenders.

So what is the likely outcome of the proposed 2014 tax extender legislation?
With the elections behind us, we hope that the gridlock crippling Washington is also behind us. We are confident that many of the expired tax provisions, particularly the R&D credit, will eventually get extended, the question is 'when?'

  • Many pundits fear that while the political tide has changed, many factors that have caused gridlock in the past are still present. Although the Republicans now control the Senate, they do not have the 60 votes needed to overcome Democratic filibusters or Presidential veto.
  • Additionally, with a presidential election two years away (and the Republicans defending 24 seats), many fear that Democrats will not work with Republicans in order to limit GOP achievements and increase Democratic odds of winning control back.
  • To complicate matters, the Republican controlled Congress may be gearing up for a battle with the President over the debt limit which is suspended until March 15, 2015. The political climate does not seem to favor comprehensive tax reform but the hope is that certain popular provisions, such as the Research and Development Tax Credits, are not cast aside.
  • In October, IRS Commissioner John Koskinen issued a letter to Congress warning that if the debate on the tax extenders "persists into December or later, (it) could force the IRS to postpone the opening of the 2015 filing season and delay the processing of tax refunds for millions of taxpayers." The warning prompted Senate Finance Committee Chairman Ron Wyden (D-OR). to urge members of Congress to act swiftly on the tax extenders. Perhaps they will yield his advice and do so.

The expectation is to see some sort of extension in this lame duck session of Congress. However, the hope is for some sort of compromise and a permanent extension so we are not in this situation two years from now.

Author: Kevin Zolriasatain | Co-Author: Luis Guerrero, MBT

If you are currently doing research and development or have been in the past five years, you may be a good candidate to secure these tax credits.