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Research Credit Update — Compromise Provides Taxpayers with a Fistful of Dollars
The tax compromise signed into law by President Obama this past Friday includes a variety of individual and business tax relief measures, ranging from the much debated 35 percent top tax rate for estate taxes through 2012, to numerous benefits for businesses, such as the 100 percent first-year bonus depreciation for investments in certain machinery and equipment placed in service prior to January 1, 2012. The compromise also notably includes a two-year extension of the federal research credit, for calendar years 2010 and 2011. Taxand US assesses the credibility of the research credit and what it means for year end tax provisions.
The federal research credit provided more than $5.5 billion dollars of benefit to companies during fiscal year 2009, and will continue to remain a strong financial benefit for companies performing research and development, as defined by the tests under Internal Revenue Code sections 41 and 174. Additionally, a majority of states have some type of research incentives, with most states conforming to the guidance set forth under the federal research credit regimes. Fortunately, most states do not conform to the federal research credit expiration dates. A number of states have strengthened their research credit incentives in recent years in order to attract and retain more businesses and have added additional benefits such as refundable tax credits in the event no state tax is due.
Although this two-year extension is a welcome development, it is important to focus on the global impact that research incentives have on a company's choice of not whether to perform R&D activities, but where. Numerous nations have surpassed the United States by offering more generous research tax benefits. In the late 1980s, the United States boasted the world's strongest research and development tax incentive. However, in the past couple of decades, other countries have aggressively added and strengthened research and development incentives. A growing trend is historically U.S.-based companies shifting research and development resources offshore to countries with permanent and more tax-favorable research incentives along with a highly educated and often comparatively lower-cost workforce.
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