Tech groups press for R&D tax-credit extension

The tax credit, first passed in 1981, has been renewed several times

A research and development tax credit expired after the U.S. Congress failed to act on an extension before its December holiday break.

Several technology trade groups have pressed for an extension and expansion of the R&D tax credit, which ended Dec. 31. A huge tax reconciliation bill passed by both the House of Representatives and the Senate included a one-year extension and expansion of the tax credit, which allows U.S. companies to get a tax credit of up to 10% of R&D spending.

Congress failed to resolve differences in the two versions of the tax reconciliation bill when the Senate became bogged down in debate over an extension of the Patriot Act, an antiterrorism package passed after the Sept. 11, 2001, terrorist attacks. Last week, the Information Technology Association of America (ITAA) issued a statement calling for Congress to extend the tax credit as soon as it comes back to work this month. The House and Senate both meet briefly today, then return to work later in January.

The R&D tax credit first passed as a temporary provision in 1981, and Congress has extended it multiple times since then. Congress has been reluctant to make the tax credit permanent partly because of its cost -- the credit costs about $7 billion a year. The group Taxpayers for Common Sense has called the tax credit a "special-interest handout" to technology companies, but temporary extensions of the program enjoy broad support in Congress.

Both the House and Senate versions of the tax reconciliation bill included a similar R&D tax credit provision, and the tax credit should not be a controversial part of the package, said Stephanie Childs, vice president of government relations for the ITAA. "There's no controversy there," Childs said. "We're hoping to get it back on the docket as soon as possible."

The expansion of the credit in the tax bill would allow U.S. companies to use another formula for calculating their R&D credits. A "flawed formula" for calculating the tax credit is now about 20 years old, said Ralph Hellman, vice president of government relations at the Information Technology Industry Council. The new formula would expand the R&D tax credit by about $3 billion, he said.

"The bottom line is we want more and more R&D to be done here [in the U.S.]," Hellman said last month.

The old formula was based on a ratio of company R&D to revenue, and many tech companies' revenues have risen faster in the past 20 years than their R&D spending, making the tax credit less valuable to them, Hellman said.

"Maybe the R&D growth isn't as fast as the overall growth of the company, but it's still significant growth," Hellman said. "We want to award companies that do that."

Copyright © 2006 IDG Communications, Inc.

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