The R&D Credit Remains Expired: What Does This Mean to You, and What Can You Do About It?

Originally enacted in 1981, the federal research and development (R&D) tax credit again expired as of December 31, 2007. Overall, this means a $9 billion tax increase for the nearly 11,000 companies of all sizes that use the credit. While there’s every reason to believe it will be extended yet again — the credit has been extended 12 times since its inception, and there’s only been one 12-month period where the credit was not in effect — many companies remain understandably concerned. The key is not to panic. There are steps we can all take to encourage Congress to enact a multi-year extension of the credit or, even better, make it permanent. 

What Is the R&D Credit, and Why Is It So Critically Important to Manufacturers?

Conceived in 1981 to encourage companies to invest in process and product improvement, the credit applies to organizations that have dedicated technical resources to improve an existing product, develop a new product, or improve a process. It can be as much as 6½ cents on the dollar of wages, supplies, and contract R&D expenses. For example, if you spend $1 million on qualifying wages, supplies, and contract R&D, you may qualify for as much as a $65,000 credit.

Manufacturers rely on this credit to help sustain their businesses. From a company’s perspective, the annual credit can be substantial. Companies claiming the credit use the money they receive to fund additional research, allowing them to continue to evolve and thrive within the marketplace.

Taking this credit away results in a substantial tax increase on R&D — on innovation! That’s the last thing we should be looking to increase taxes on...especially in the Midwest, where manufacturing is such an important industry. 

What Can We Do?

The good news is that the R&D credit has an overwhelming amount of industry and government support. There have been discussions about making the credit permanent for more than 10 years now, and the fact that it’s been extended 12 times in its 26-year history is telling. Sometimes it’s been extended a year, sometimes two, sometimes five. It will likely be extended again; it’s just a matter of when and for how long.

The problem is that the longer Congress waits to extend it, the bigger a problem they create for those who use it. Companies rely on the credit and pay estimated tax payments that factor in these credits. The longer Congress waits, the more uncertainty that’s created, and no one likes uncertainty.

So what can we do? Rally. Take a moment to find out how you can get involved with efforts through organizations such as the National Association of Manufacturers (NAM) and the R&D Credit Coalition, which are working together with many local manufacturing associations to get a multi-year extension of the R&D credit.