Washington Update: Congress passes $680 billion tax package, makes R&D credit permanent

For lawmakers, the 2015 holiday season in Washington meant Christmas tree lightings, holiday receptions, and of course, the debate over tax extenders.

In the nick of time, lawmakers passed a $680 billion deal that enacts a number of tax policies, including making permanent 22 expired tax provisions while extending 33 others through at least 2016. Among the former is the R&D credit, which Grant Thornton has long recommended be expanded and made permanent.

For full details on what the legislation includes, view the latest Tax Legislative Update.

The gift of added certainty
Businesses, many of which do their financial planning long before Congress even begins to consider extenders, will likely welcome the added certainty this deal provides.

One of the most widely used of the extenders, the R&D credit, illustrates just how much a business could stand to gain with newly enacted permanency. The most recent figures made available by the IRS show the average R&D credit claim in 2012 was $694,000. A little over half of the claims that year were filed by companies with less than $10 million in gross receipts. For a medium-sized business investing in growth and operating on tight margins, the credit can have a significant impact on the bottom line and their ability to expand.

A boost to the U.S. economy
In an increasingly competitive global market, the R&D credit is particularly vital – not just for burgeoning businesses, but the U.S. economy in general.

“R&D is the lifeline of companies,” said Corporate Strategic Federal Tax Services Partner Rob Levin. “It helps create new products, allows entry into new markets, and keeps companies technologically advanced from a global perspective. The R&D tax credit helps U.S. companies fund these efforts, which in turn lead to business growth, investment and job creation.”

There’s no better example of this than American manufacturing, which faces tremendous international competition.

“Manufacturing is in a continuous race to create products better, faster, more safely and more efficiently,” said, National Managing Partner of Consumer and Industrial Products Jeff French. “In order to stay ahead in this rapidly evolving industry, manufacturers must routinely invest in the future.”

Congress passes $680 billion tax package, makes R&D credit permanentIt’s no surprise then that manufacturing, with R&D credit claims amounting to $6.7 billion in 2012, leads all other industries. Yet there is still plenty of room for advancement for U.S. manufacturers, and with a clearer outlook, they can now adequately plan for the long term.

Congress also enhanced the R&D credit by making it partially refundable for startups.

“Previously, startup businesses, which typically don’t earn profits in their first few years, were unable to take advantage of the R&D credit,” said National Managing Principal of Public Policy Mary Moore Harmrick. “With partial refundability, those businesses can now recognize a benefit, and we hope this will further incentivize investment in R&D.”

What does this mean for tax reform?
Although this deal provides some certainty for businesses and individuals alike, it doesn’t diminish the need for an overhaul of our tax system. Fortunately, it will make comprehensive tax reform a little easier. This legislation has effectively ‘cleared the decks’ for lawmakers. Because the revenue baseline has been permanently changed, future tax reform proposals will require fewer revenue raisers to be considered revenue neutral.

The pathway to comprehensive reform may have gotten technically easier, but political hurdles may still stand in the way. What happens next will likely depend on next year’s presidential election. Stay tuned.