Congress OKs Tech-Friendly R&D Tax Credit

Datamation content and product recommendations are editorially independent. We may make money when you click on links to our partners. Learn More.

An expired R&D tax credit bill that a tech industry group was trying to revive got new life Thursday when Congress approved a one-year, $7.56 billion extension for the program.

“Research and development is the lifeblood of the technology industry so we are pleased that a seamless R&D extension has been added to this bill,” Rhett Dawson, president of the Information Technology Industry Council (ITI), said in a statement.

President Bush is expected to sign the legislation next week.

“The credit expired in June and didn’t have a big impact. Now, companies can take the credit for this year and then go through next year,” Rick White, CEO of the Silicon Valley-based lobbying group TechNet, told internetnews.com.

TechNet, the 150-member network of CEOs and senior partners founded four years ago by venture capitalist John Doerr, and other tech lobbying groups, have long sought a permanent extension of the R&D credit. The credit was originally enacted in 1981 and has since been extended 11 times through various tax legislation. In November 1999, Congress approved a five-year extension of the R&D credit to June 30, 2004.

White, a former Republican congressman from Seattle, said the R&D tax credit is a proven incentive for increasing industry’s investment in U.S.-based research and development. According to TechNet, the U.S. high technology industry spends more on R&D than any other industry.

Successful passage of the R&D tax credit represents the first movement by the 108th Congress, which is due to adjourn within the next two weeks, to approve several tax bills favored by the tech industry.

TechNet particularly supports legislation protecting broad-based stock option plans and a proposal to reduce the tax on foreign dividends from 35 percent to 5.25 percent for one year.

In March, the Financial Accounting Standards Board (FASB) proposed new rules requiring publicly traded companies to expense the “fair value” of stock options, restricted stock and other equity awards to employees for fiscal years beginning after December 15, 2004.

The technology industry contends the FASB proposal would hinder IT’s ability to attract and retain qualified workers. TechNet and others rallied around a legislative proposal that would mandate the expensing of stock options for the CEO and the next four most highly compensated executive officers of a company. In addition, no expensing would be required of small companies, allowing them to continue to offer stock options as incentives to employees.

The tech proposal was embraced by the House of Representatives, which approved the measure in July on a 312-111 vote. The Senate has yet to take any action. White said the tech industry was “still looking for a vehicle” for the stock optioning plan

“We’ve got some leadership [in the Senate] we’ve haven’t convinced yet,” White said, predicting there would be no action on the legislation before the November general elections. Legislation not approved by the time Congress adjourns will have to start the legislative process all over again in January unless there is a lame duck session after the elections.

Another key element of the TechNet platform is to build support for its two-year-old proposal to reduce the tax on foreign dividends for one year. Citing a J.P. Morgan study, TechNet says the initiative would “repatriate” more than $300 billion into the U.S. economy and create as many as a half million new jobs.

“Under this proposal, impact on federal revenues is expected to be positive for the first year and negligible over a ten-year period; at current taxation levels, these dollars would just remain overseas,” TechNet wrote to President Bush in March. “In short, here’s a way to enable a tremendous amount of domestic spending without increasing taxes, reducing federal revenues or taking money away from needed federal programs.”

The letter adds, “Once this money is repatriated, specific targeted incentives can ensure that it is invested for maximum economic impact.” White said Thursday the proposal was “moving along” and he “absolutely” felt confident the legislation would be approved.

Both the House and the Senate have passed legislation granting the tech tax break, but in both cases the provision is included in a much broader and controversial bill aimed at European Union trade sanctions against a wide range of U.S. goods. Differences between the two bills are still being worked out in conference.

The EU sanctions followed a ruling last year by the WTO that called an annual $5 billion tax break given to U.S. exporters an illegal export subsidy. The WTO set a March 1 deadline for Washington to change its tax code or be penalized. The penalty increases by 1 percent per month over the next year.

The credit is limited to R&D work performed in the United States with approximately 75 percent of the credits devoted to employee wages. The credit is retroactive to this year’s June 30 expiration date and extends through 2005.