|
Ways and Means Committee Chairman Rangel Introduces Bill with One-Year Extension of Research Credit and Other Expiring Provisions
KPMG’s Research Credit group will be providing future updates of the status of the research credit as well as other related information in TaxNewsFlash-Research Credit. If you would like to receive future email alerts concerning the research credit, reply to
US-KPMGWNT@kpmg.com
House Ways and Means Committee Chairman Charles Rangel (D-NY) yesterday introduced H.R. 3996, “extenders” legislation that includes a one-year extension of the research credit, for amounts paid or incurred after December 31, 2007, through the end of 2008, as well as 37 other expiring provisions. The committee has scheduled a mark-up of the legislation, entitled the Temporary Tax Relief Act of 2007, for the morning of November 1.
The research credit extension in H.R. 3996 would not include any modifications to the credit.
Most elements of Chairman Rangel’s extenders bill—including the one-year extension of the research credit—were included in the bill he introduced last week, H.R. 3970, the proposed Tax Reduction and Reform Act of 2007. The principal provision in that bill is a permanent repeal of the alternative minimum tax (AMT) on individuals, beginning in 2008, and enactment of an additional tax on higher-income income individuals that would offset the cost of this repeal. For corporations, there would be a reduction in the top corporate marginal tax rate from 35% to 30.5%, beginning in 2009. There are other tax reductions and offsets that would affect both individuals and corporations, with the intention of keeping the legislation revenue neutral over 10 years. Among many other things, the section 199 deduction for income from domestic production activities would be repealed, and taxpayers would no longer be able to use the LIFO inventory method.
H.R. 3996 would provide a one-year extension of 38 tax provisions that are scheduled to expire at the end of 2007, including the research credit. The extenders bill would also (similarly to H.R. 3970) include a one-year AMT “patch” intended to relieve many individual taxpayers from liability for the AMT in 2007 (which H.R. 3970 would repeal in 2008). Rangel’s extenders bill would cost more than $70 billion over 10 years, $50.59 billion of which would be for the 2007 AMT relief. H.R. 3996 does not, however, include any revenue raisers to cover the cost of the AMT patch and the extenders. There is an expectation that, at the November 1 mark up, revenue raisers from the Tax Reduction and Reform Act of 2007 will be added to H.R. 3996 to cover the cost. Rangel announced that he has received assurances of “swift consideration” of the bill in the full House after it is marked up by the Ways and Means Committee.
Revenue Effects: Research Credit
Based on a preliminary revenue estimate of H.R. 3970, the one-year extension of the research credit is estimated to cost $8.998 billion over 10 years:
- $2.881 billion in fiscal year 2008, i.e., the period from October 1, 2007 through September 30, 2008, and
- $2.211 billion in fiscal year 2009
- With smaller revenue reductions over the following five fiscal years
Although this is only a one-year extension, the effect on federal tax revenue of a change in the law from not allowing a credit for amounts paid or incurred in calendar year 2008 to allowing a credit will be realized over several years, reflecting changes in estimated tax payments, extension payments, reductions in tax payments in later tax years as credit carryovers are used, the effect of section 280C(c) adjustments on deductions, etc. Earlier in 2007, the Joint Committee on Taxation estimated that making the research credit permanent, with no modifications, would cost $98.9 billion over 10 years.
|
Other Bills
In May 2007, Congressmen Sander Levin (D-MI) and Dave Camp (R-MI) and other members of the House Ways and Means Committee introduced H.R. 2138, the proposed Investment in America Act of 2007. That bill would make the research credit permanent and make some modifications, principally to raise the rate of the elective alternative simplified credit (ASC) from 12% to 20%.
On October 19, 2007, Senate Finance Committee Chairman Max Baucus (D-Mont) and fellow Finance Committee member Orrin Hatch (R-UT) introduced S.2209, the proposed Research Credit Improvement Act of 2007. Their bill would make the credit permanent, and raise the ASC to 20%, but it would also repeal the traditional incremental credit beginning in 2010.
KPMG Observation
Rangel’s proposal does not address the fate after 2008 of the research credit. Introduction of a one-year extenders package, by itself, would in most years not be considered a comment on whether enactment of a permanent research credit or modifications to the credit are desirable or politically feasible. However, Rangel’s inclusion of only a one-year extension in his proposed Tax Reduction and Reform Act of 2007 is viewed by some as an indication that Congress might consider a permanent termination of the credit in the context of broader structural changes to the tax code.
A senior Ways and Means Committee member suggested last week that many corporations would prefer a reduction in the top corporate tax rate to 30.5% to a research credit. A Treasury Department study issued earlier this year concluded that the corporate tax rate could be reduced to 27% if several tax benefits, including the research credit and the section 199 deduction, were terminated.
|
Finance Committee Chairman Baucus has not scheduled any action on an extenders package in his committee, but committee members have been discussing the issue. An extenders bill does not necessarily need to be considered by the Finance Committee before it is considered by the full Senate.
There are no procedural requirements or deadlines that would force Congress into action before the credit expires at the end of 2007. Congress is currently expected to remain in session through mid-December, and the House has set the beginning of its 2008 session for January 15. There are many issues unrelated to the research credit, such as revenue costs, that could affect, and possibly prolong, Congress’s consideration of an extenders package.
For more information, contact a KPMG tax professional with the Research Credit group:
Christine Kachinsky, (212) 872-2187, ckachins@kpmg.com
Adam Uttley, (213) 593-6732, auttley@kpmg.com
|
