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The Research & Experimentation Tax Credit

Mark Marich

Last week, the House Committee on Small Business held a hearing on "Helping Small Business Innovators through the Research and Experimentation Tax Credit." Led by the Subcommittee on Contracting and Technology, members listened to the experience of technology entrepreneurs in utilizing this tool, commonly known as the R&D tax credit.

All witnesses stressed two problems: the uncertainty surrounding the permanence of the credit and the administrative burden that the credit’s complexity imposes. They expressed that these barriers prevent small business from using the credit. Witnesses also mentioned other barriers, such as the net operating loss limitation in the credit’s provisions (Scott Ferros, VP and CIO of BlackHawk) and the credit’s interactions with the Alternative Minimum Tax affecting business decisions (Bart Heenan, CEO of Morphix Technologies).

So far, the credit, intended to encourage businesses to test the waters of innovation, has been extended 13 times since 1981. Yet the benefits are clear. Chairman Glenn Nye cited the finding that “every dollar in R&D tax credits yields another $2 in research.” Moreover, “R&D job growth is small business job growth” because small firms employ almost 40% of researchers, scientists and engineers, said the Chairman.

Witness Richard Bendis said Innovation America, the American Society of Mechanical Engineers, and the National Association of Seed and Venture Funds all support the permanent extension of if the R&D tax credit program. Karl Schoenbach from Old Dominion University also supported the credit saying that “any incentive, such as tax credits, which allow the company to be less risk-adverse, will help the universities to get their innovations developed and commercialized.”

Subcommittee Chairman Nye and Ranking Member Aaron Schock promised to give attention to the lack of confidence in the research and experimentation tax credit among small businesses. They recognized that the credit could be a far greater catalyst for innovation and job creation if Congress reduces compliance costs and changes its impermanent nature. Chairman Nye also called for cutting taxes for small businesses.

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