Enhanced Federal Research Tax Credits? Yes!!

A revisit of my October 4 posting http://tax-fishing-and-other.blogspot.com/2010/10/enhanced-federal-research-tax-credits.html in light of the passage of the Tax Relief, Unemployment Insurance Reauthorization, And Job Creation Act Of 2010.

Enhanced Federal Research Tax Credits? Hopefully, but not quite yet... FINALLY!

By now, many have already heard about how President Obama signed the Small Business Jobs Act of 2010 into law on September 27.  Rather than go into a detailed discussion of the Act, I'd like to clarify two particular items that seem to be widely misreported (at least back in September).

In short, the federal research tax credit does not (under now-current law as of December) qualify for either of the following provisions in the new law:

• Five-year carryback of general business credit of eligible small business - This provision extends the carryback period for eligible small business tax credits from one to five years for eligible small business taxpayers.  However, this provision is only effective for credits determined (i.e., generated) in the taxpayer's first taxable year beginning after December 31, 2009.  And since the federal research tax credit has (under now-current law as of the time of this updated writing) expired been extended for qualified expenditures paid/incurred after December 31, 2009 through December 31, 2011, there are no federal research tax credits to be determined during that period.

• General business credit of eligible small business not subject to alternative minimum tax - This provision effectively allows eligible small business tax credits to offset an eligible small business taxpayer's AMT liability.  However (similar to the 5-year carryback provision), this provision is only effective for credits determined (i.e., generated) in the taxpayer's first taxable year beginning after December 31, 2009.  Again, since the federal research tax credit has (under now-current law as of the time of this updated writing) expired been extended for qualified expenditures paid/incurred after December 31, 2009 through December 31, 2011, there are no federal research tax credits to be determined during that period.

In this case, I'm especially glad to say "I told you so" so go out there and claim your credits (and don't forget to write if you have any questions or comments)!

Despite this bad (and hopefully temporary) news, there is still hope that Congress will extend the federal research tax credit retroactively from January 1, 2010, but we'll have to wait and see about that.  As for my personal thoughts on the prospects of a retroactive extension, I think there's a good chance of it for the following reasons:

• President Obama on September 8 has already identified the federal research tax credit as an important item (see http://tax-fishing-and-other.blogspot.com/2010/09/white-house-releases-research-tax.html).
• The House (albeit back in January 2009) introduced H.R. 422 which would (1) extend the regular federal research tax credit through December 31, 2010, (2) increase the Alternative Simplified Credit ("ASC") method of computing the federal research tax credit to 20%, and (3) make the ASC permanent.  So there is (or at least was) clearly some support in the House as it was introduced with 105 co-sponsors.
• The Senate (albeit back in June 2009) introduced S. 1203, which effectively mirrors H.R. 422. So there is (or at least was) clearly some support in the Senate as it was introduced with 22 co-sponsors.

Note: The Act was passed by Congress as H.R. 5297 and became Public Law No. 111-240 when it was signed into law.


Links:

• Joint Committee on Taxation's writeup (JCX-47-10)
• H.R. 5297 on Thomas (at the Library of Congress)
• H.R. 422 on Thomas (at the Library of Congress)
• S. 1203 on Thomas (at the Library of Congress)