The Burrill Report


President Barack Obama is calling on Congress to permanently extend the Research and Experimentation Tax Credit as part of a series of steps he outlined to reinvigorate the U.S. economy in a speech September 9 in Cleveland, Ohio. Life sciences associations have long called for making the tax credit permanent and welcomed the proposal.

Obama wants to expand the tax credit to $100 billion over the next ten years, the largest increase in the history of the credit. The credit has been extended 13 times since its creation in 1981, but was allowed to lapse since the end of last year.

Though Republicans have supported extension in the past, the contentious political environment will require a fight for it to be successful. Republicans have voted against the tax credit multiple times this year, and are now blocking legislation that would renew this credit, the White House said. “Making this provision permanent would avoid this type of outcome and give businesses the certainty they need to accelerate R&E investments to create jobs today and in the future,” it said.

Under Obama’s plan the research and experimentation credit would be increased by about 20 percent. Eligible research and experimentation would need to be performed in the United States.

The plan would simplify the calculation of the tax credit by abandoning the previous approach that the administration characterized as a “complex formula” and “outdated.” Instead, the White House proposes to increase the rate of the simpler credit to 17 percent, which it said would make it more attractive and simplify tax filing for businesses.

“An expanded, simplified, and permanent R&E credit will help keep the U.S. economy at the cutting-edge of 21st century technologies, while expanding high-tech jobs, encouraging innovation, and increasing future productivity and growth,” the White House says.

But while life sciences trade groups like the Pharmaceutical Research and Manufacturers of America, the Biotechnology Industry Organization, and the Advanced Medical Technology Association have been pushing for an R&D tax credit, venture investors who provide critical funding to life sciences companies are not boosters of the idea.

One reason venture investors aren’t excited by the proposal is that the companies they back, at least those most in need of finding funding to support R&D, don’t get any boost in the near-term because they generally don’t have tax liabilities to offset.

Another reason they don’t like it is that the administration will be looking to pay for the tax credit in part by taking it out of the hides of VCs. The administration said the cost of making the tax credit permanent could be offset by closing more than $300 billion in loopholes and other measures proposed in the fiscal 2011 Budget. Among those is the way so-called “carried interest” is taxed. Carried interest is the share in the profits that a venture capital firm for managing a fund has in that fund.

Carried interest has been taxed at the long term capital gains tax rate for more than 30 years. The National Venture Capital Association says that the rate serves as an important incentive for long term investment in high risk start-up companies and is not happy about congressional efforts to treat carried interest as ordinary income to, in part, pay for the R&D tax credit. “This policy would essentially double the taxes for venture capitalists — our country's job creators,” says the NCVA, “discouraging investment in new companies at a time when Congress should be doing all it can to support the start-up ecosystem.”

Burrill & Company, publisher of The Burrill Report, is a member the National Venture Capital Association.


September 09, 2010
http://www.burrillreport.com/article-obama_calls_for_a_permanent_extension_of_the_rd_tax_credit.html