Research & Development (R&D) Tax Credit
ISSUE BRIEF

Summary / Issue
The R&D tax credit was originally enacted back in 1981. On December 31, 2005, the credit expired for the twelfth time.

Impact on AeA Members

• The R&D tax credit helps most AeA member companies (including hardware, software and manufacturers), regardless of size, who undertake research.
• Enactment of a permanent R&D tax credit will enable companies to have certainty in their tax planning.
• The R&D tax credit is responsible for stimulating U.S. investment, wage growth, consumption and exports, which all contribute to a stronger economy and a higher U.S. standard of living.

Status of the Issue

• The credit expired on December 31, 2005.
• Both the House and Senate included a one-year extension of a strengthened credit in their versions of the tax reconciliation bills last year; however, Congress adjourned for the year before completing work on a final bill.
• Legislation to enhance the credit and make it permanent has been reintroduced in both the House and Senate (the Investment in America Act of 2005).

AeA: Actions Taken or Actions Proposed
AeA will continue to champion the importance of strengthening the R&D tax credit and making it permanent, and will also stress the vital importance of retroactively extending the credit as soon as possible.

Issue Background
There have been efforts to make the R&D tax credit permanent since most business R&D activities span five to ten years. If the credit is not permanent, it is impossible for it to act as a long-term incentive to increase R&D investment.

Support for the R&D tax credit in Congress has always been strong and bipartisan. The main hindrance to its permanent extension has always been its cost. Although AeA has been successful in convincing Congress that many companies have more R&D ideas than money and that the R&D credit provides a critically important incentive for funding the riskiest ideas, cost will always be an issue.

During deliberations on the 2004 international tax bill (the American Jobs Creation Act), the Senate approved an extension and an enhancement of the R&D credit in its version of this legislation.  Unfortunately, because the enhancement was not included in the House-passed version of the tax bill, the enhancement did not make it into the final bill sent to the President for enactment. During consideration of the tax reconciliation bill in late 2005, both the House and Senate did include the enhancement.  Although Congress did not finish work on the bill before adjourning for the year, both chambers including the modified language is an important step in the right direction.