Magazine for Senior Financial Executives: Foiled again

Foiled again – R&D tax credit

Steve Bergsman

Despite enthusiasm for the research-and-development (R&D) tax credit, first enacted in 1981 as a temporary tax-saving measure, applying the credit has proved to he nettlesome. Last fall, yet another company was foiled in its effort to claim the credit when a district court in Illinois more narrowly defined its proper application.

“The R&D credit is extremely complicated and often difficult to implement by tax departments. And questions linger over what is considered qualified research,” explains Jeff McMillen, tax counsel and director of tax policy for the American Electronics Association (AEA), in Washington, D.C. Nevertheless, the AEA, among others, fully supports congressional efforts to make the tax credit permanent.

“The major problem has been finding the revenue in the budget,” says Bill Sample, chairman of the lobbying group known as the R&D Credit Coalition and senior director of domestic tax and tax affairs for Microsoft Corp. “The revenue cost of the credit is a little over $2 billion a year, and there are always competing priorities.”

The current tax credits were extended in last year’s tax bill, but will expire again in June. Last year, Sen. Orrin Hatch (R-Utah) introduced a bill to make the credit permanent. Hatch’s bill makes just one change to the existing credit, calling for an increase in the rate for an alternative research credit for companies with sagging sales.

The bill doesn’t address a better definition of credit qualification. The parameters of the credit are instead being defined by the Internal Revenue Service through the courts. In October, a District Court held that computer automation costs for United Stationers Inc., an Illinois stationary wholesaler, were ineligible for research credit. “The IRS continues to show interest in trying to narrow the credit’s applicability,” observes Sample.

Indeed, Mark VanCuren, national director for research and experimentation initiatives for Coopers & Lybrand LLP in New York, suggests that changes in the law are badly needed. “If Congress intends the credit to be as restrictive as the IRS and the courts are putting forward, it has to say so,” he says. “Then at least the taxpayers will know the rules and can figure out whether the effort to apply for credits makes sense.”

TOUGH LINE ON TAX CREDITS

According to IRS Code Sec. 41(d)(1), the research tax credit is available only for research:

* that is eligible for expensing under Code Sec. 174

* that is undertaken for the purposes of discovering information that is technological in nature

* the application of which is intended to be useful in the development of a new or improved business component

* that consists largely of an experimentation process relating to a new or improved function, performance, reliability, or quality

COPYRIGHT 1998 CFO Publishing Corp.

COPYRIGHT 2000 Gale Group