Good News For Entrepreneurs On Fiscal Cliff: R&D Tax Credit Extended

The government gave the nation’s suit-and-tie mad scientists a tax break again this year, agreeing to extend the much-loved R&D tax credit. “We can’t keep cutting things like basic research and new technology and still expect to succeed in a 21st-century economy,” said President Obama, hailing Congress’s passage of a budget related to the so-called “fiscal cliff.”

The popular 1981 law to incentivize research-oriented hiring has generally been extended annually for its 30-year existence, and there’s good evidence that the tax credit really does spur innovation. In 2005, the Congress Budget Office concluded [PDF]:

A consensus has formed around the view that R&D spending has a significantly positive effect on productivity growth, with a rate of return that is about the same size as (or perhaps slightly larger than) the rate of return on conventional investments.

Sean Haggard, Tax Manager of Florida accounting firm, Kaufman Rossin, tells Businessweek that the lion’s share of R&D tax credits, 80 percent, goes to the big dogs with $250 million or more in gross receipts. Smaller companies, often thought an important engine of economic innovation, use a modified version of the tax code to calculate the credit, the “Alternative Simplified Credit” formula. Entrepreneur Magazine gave a helpful dollar-by-dollar hypothetical of how this might play out for a small business owner:

Let’s say you averaged $50,000 in qualified R&D expenses over the past three years. That makes your credit base $25,000. You spend $60,000 this year, or $35,000 more than your base, and 14 percent of that amount yields a tax credit of $4,900. Typically, you can claim the credit in its entirety or amortize it over a period of 60 months. If your company is a startup and doesn’t have three years of history, the credit is a flat 6 percent of qualified research expenses.

In 2012, Senators Coon, Enzi, and Schumer spearheaded an attempt for a startup-specific tax credit, the Startup Innovation Credit Act, but it was referred to a committee (i.e. killed) back in July.

How will you use your tax credit this year? Build the next iPhone? Launder the money and head to Disney World? Build a basement meth lab? Oh, the possibilities!