Permanent and enhanced research and development (R&D) tax credit

• A permanent research tax credit that is available to more research-intensive businesses will stimulate additional R&D spending in the U.S. Since its enactment in 1981, the R&D tax credit has demonstrated that it is a powerful and effective incentive for firms to increase research spending. Congress has endorsed the credit by extending it 10 times.
• By enacting the Alternative Incremental Research Credit (AIRC), Congress also extended the incentive effect of the credit in 1996 to companies that, due to changing economic circumstances relative to the base period, were unable to claim the credit despite significant R&D spending.
• To provide stability and broaden the reach of this proven incentive, Congress should make the credit permanent, increase the AIRC rates, and provide an alternative simplified credit calculation to induce even more research-intensive businesses to undertake additional research spending.
• The lack of a permanent credit causes uncertainty and could result in decisions by some companies to locate future projects offshore, where the R&D policies are more generous and stable, resulting in a permanent loss of U.S. technology advancements, jobs and industrial innovation.
• The economic slowdown of recent years has further increased the pressure on U.S. companies to cut costs while attempting to maintain a strong competitive position. In order to ensure that R&D activity continues to produce jobs and growth in the U.S., federal government policies must be a dependable inducement to locate and increase research activity in the US.

Current bills:
HR463 (N. Johnson/Matsui): Would make the R&D tax credit permanent, increase AIRC rates and provide an alternative simplified credit
S664 (Hatch-Baucus): Companion to HR463 Tax relief for overseas profit repatriation (dividends received deductions)
S1637 (Grassley-Baucus): Includes an 18-month extension of the R&D tax credit. An increase in AIRC rates and an alternative simplified credit would be effective Jan. 1, 2005 through Dec. 31, 2005.

Tax relief for overseas profit repatriation

• A temporary reduction in corporate tax on foreign earnings returned to the U.S. could lead to a $300 billion U.S. inflow, according to J.P. Morgan.
• The proposal would provide an 85% deduction on all distributions of earnings from active foreign business operations in excess of a base amount during a one-year period. These earnings are currently taxed at 35%. This immediate and significant infusion of cash would be used by many companies to invest in the U.S. economy through debt reduction, increased capital spending and research and development.

Current bills:
HR767 (English): Would reduce by 85% taxes on three years of foreign earnings brought back to the U.S. during a one-year period
S596 (Ensign/Boxer): Companion to HR767
S1637 (Grassley/Baucus): Includes the language from S596

Broadband tax incentive

• A tax incentive to encourage broadband providers to extend and upgrade their networks could make a positive contribution to the economy, improve workplace efficiency, and bring new services to communities.
• There are two feasible options for this incentive. The first would provide a tax credit for current-generation broadband investment in rural and underserved areas, as well as a credit for next-generation investment in other areas. The second would work the same way but through expensing rather than a tax credit.

Current bills:
HR768 (English-Matsui): Would provide a 10% tax credit for broadband investment in rural and underserved areas and a 20% tax credit for next-generation broadband investment in other areas, for five years
HR769 (English-Matsui): Would allow 50% expensing for broadband investment in rural and underserved areas and 100% expensing for next-generation broadband investment in other areas, for five years
S160 (Burns-Baucus): Companion to HR769
S905 (Rockefeller): Companion to HR768
S1637 (Grassley/Baucus): Includes a one-year version of the language in S160

20-year carryforward period for foreign tax credits

• The intent of the foreign tax credit provision is to prevent double taxation on income taxed in a foreign jurisdiction. For many companies, the current economic situation has resulted in unused foreign tax credits that will expire, resulting in unfair double taxation.
• To encourage foreign trade and financing, the foreign tax credit carryforward period should be 20 years, the same as the net operating loss carryforward period.
• The carryforward provision should include credits on record as of Jan. 1, 2003. The intent of the foreign tax credit provision is to prevent double taxation on income taxed in a foreign jurisdiction. For many companies, the current economic situation has resulted in unused foreign tax credits that will expire.

Current bills:
S1637 (Grassley/Baucus): Includes a provision extending the carryforward period from five years to 20 years and reducing the carryback period from two years to one year, effective for credits on record as of the year of enactment of legislation

Opposition to tightening of earnings stripping rules

• Tightening of IRC Section 163(j) – also known as earnings stripping rules – would limit tax deductions that U.S. subsidiaries of foreign corporations could take on loans from related and unrelated parties.
• Legislation that seeks to eliminate the debt-to-equity "safe harbor" threshold or to lower the expensing limit of interest paid on debt would impose a significant tax on these U.S. subsidiaries and would severely hinder their domestic investment.

Current bills:
HR2896 (Thomas): Includes a provision to limit the tax deduction U.S. subsidiaries could take on loans and to eliminate the debt-to-equity threshold