R&D tax credit extended: What IT companies need to know

Congress has reached a one-year agreement to retroactively reinstate more than 50 tax provisions that expired at the end of 2013. The legislation offers the tech industry temporary relief on important tax benefits like the R&D credit and bonus depreciation, but will create new uncertainty for 2015.

The president is expected to quickly sign the Tax Increase Prevention Act of 2014 (H.R. 5771). It extends the expired provisions for just one year.

Why one year?
Republicans and Democrats attempted to negotiate a $450 billion deal that would have extended most of the expired provisions for two years and made 10 of them permanent, including the alternative simplified R&D credit. But the Obama administration threatened a veto because the agreement would not have extended enhancements of the child tax credit and the earned income tax credit, and the deal fell apart. When the negotiations collapsed, the GOP insisted on a one-year extension instead of the more typical two-year extension that lawmakers have provided in the past.

What about the research credit?
Both the House and Senate had offered proposals earlier in the year to enhance many of the expired provisions.
  • The Senate Finance Committee proposed to make the R&D credit refundable against the alternative minimum tax and allow it to offset up to $250,000 in payroll taxes for businesses less than five years old with less than $5 million in annual gross receipts. The legislation would have been particularly helpful for startups.
  • On the House side, a bill was approved to make the alternative simplified R&D credit permanent at an increased rate of 20%.
Unfortunately, neither change was included in the one-year deal that ultimately passed. H.R. 5771 ultimately only provides a straight extension of current law for all the expired provisions.

What about Section 199?
The Section 199 deduction for domestic production activities is a permanent provision, and does not need to be extended. Software companies can continue to take advantage of this provision.

Will Congress resurrect a longer deal in 2015?

House Republicans preferred a one-year extension of the expired provisions so they could return in January when Republicans take control of the Senate and attempt to pass even more favorable legislation. But this may be difficult, as the president will still be in the White House. Senate Democrats could also block the legislation using procedural hurdles that are difficult to overcome without 60 votes. In addition, Republicans will immediately face many competing priorities in 2015, including tax reform efforts to repeal certain tax incentives. IT companies could again be waiting for an extension of these same tax provisions late in 2015.

What does this mean for bonus depreciation in 2015?
IT companies can immediately deduct half of the cost of eligible equipment placed in service in 2014 before bonus depreciation expires again beginning in 2015. While bonus depreciation is popular with both parties and may be extended again, there are no guaranties. When considering making investments in equipment in the coming year, businesses should understand that they may not be able to deduct half of the cost immediately.

What can I do now?
IT companies can take the benefit on 2014 financial statements, but cannot assume an extension for 2015 financial reporting until and unless new legislation is enacted. Although prospects on a quick deal in 2015 seem unlikely, a retroactive extension of many provisions late in the year is still very possible. Companies should continue to meet all the recordkeeping and substantiation requirements so they can claim benefits like the R&D credit once they are extended.