House approves permanent R&D credit

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The House voted 274-145 on May 20 to modify and permanently extend the R&D tax credit. The legislation (H.R. 880) would repeal the traditional R&D credit but would make the alternative simplified credit (ASC) permanent and increase the rate from 14% to 20%. H.R. 880 would also make permanent the basic research and the energy research credits at a 20% rate, and would allow private companies with less than $50 million in annual gross receipts to take the R&D credit against alternative minimum tax.

The lopsided vote showcases the strong bipartisan support for the credit, but the Senate is not expected to take up H.R. 880 on its own. The R&D credit expired with more than 50 other popular tax provisions at the end of 2014, and Congress will likely address all of these provisions as part of a single larger package.

The administration threatened to veto the bill because of the estimated $182 billion cost, but indicated support for the underlying policy. The administration may be willing to swallow its cost concerns if Republicans can put together a package that includes the president’s top extender priorities. Democrats and Republicans came close to a bipartisan agreement last year that would have made the R&D credit and nine other expired provisions permanent. That deal included a Senate proposal to make the R&D credit refundable against up to $250,000 in payroll taxes for businesses less than five years old with less than $5 million in annual gross receipts. The administration scuttled the agreement because it was unhappy that an extension of temporary enhancements to the earned income tax credit (EITC) was not included.

Lawmakers may be able to resurrect this compromise if conservative Republicans can agree to include the EITC provision or Democrats acquiesce to something else in its place. Such a deal would permanently change the projected revenue baseline and could make tax reform easier. Because the budget baseline would assume the tax cuts are permanent, lawmakers would not need to include as many revenue raisers to achieve a revenue neutral score.

Failing a larger permanent deal on the extenders, Congress is expected to pass at least a short-term retroactive extension of most of the expired provisions before the end of the year.

Dustin Stamper
+1 202 861 4144

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