The recent wave of favorable developments for the R&D tax credit continued earlier this month as a new bill H.R. 5187 was introduced and referred to the Committee on Ways and Means to increase the Alternative Simplified Credit (“ASC”) rate from 14% to 20%.
This bill follows on the heels of the PATH Act of 2015 which granted the R&D tax credit permanent status, after thirty-plus years as a temporary incentive, and introduced several other changes allowing small to mid-size businesses to utilize the credit against Alternative Minimum Tax (AMT) or payroll taxes.
About the ASC Method:
Added in 2007, the ASC method provides a significantly less complex method of calculating the “base amount” component of the credit calculation than the existing “general” method demanded. However, utilizing the ASC method comes at the cost of a 6 percent credit reduction.
About H.R. 5187:
The new bill H.R. 5187 – Research and Experimentation Advances Competitiveness at Home Act of 2016 or REACH Act of 2016, introduced by Representative Patrick Tiberi (R-OH-12) would amend IRC Section 41 to increase the credit percentage applied under the ASC method for years beginning after 12/31/2015.
*Note, the election of the ASC or general method of credit calculation may be made annually. The election is pre-approved by the IRS, and made by claiming the method in the appropriate section of Form 6765. Therefore, it would be advisable to calculate the credit using both methods, and selecting the method which provides the taxpayer with greatest opportunity.
A Step in the Right Direction
The R&D tax credit is intended to incentivize innovation; however a recent Information Technology & Innovation Foundation report suggests that the U.S. ranks just 27th out of the 42 countries studied for the generosity of their R&D incentives.
For this reason, we at Tax Credits Group strongly support the REACH ACT of 2016.
While the 20% credit rate today is still far below that of the initial 25% rate that was in place in 1981 when the credit was originally enacted, this legislation, as well as the Path Act or 2015 are two great steps forward. We believe they will spur and incentivize many U.S. businesses to invest in new domestic R&D efforts.