R&D TAX CREDIT EXTENSION THROUGH 1990 PASSES HOUSE WAYS & MEANS CMTE.; BILL INCLUDES GAO STUDY TO LOOK AT HOW TO IMPROVE CREDIT's EFFICIENCY

A bill to extend the R&D tax credit another two years, until the end of 1990, was reported out of the House Ways & Means Committee on July 14. Under current law, the credit is due to expire on Dec. 31, 1988. According to a July 15 summary of the legislation (HR 4333, the Miscellaneous Revenue Act), the current R&D credit of 20% would be extended through Dec. 31, 1990. The legislation also requires the General Accounting Office to conduct a study on "how to better target and improve the efficiency of the credit" and to submit a report to Congress by the end of next year. A companion bill in the Senate, S 2238, introduced by Sen. Bentsen (D-Texas), is scheduled for Finance Committee markup on July 26. Under the House bill, companies choosing to apply the 20% tax credit would have to reduce the amount of R&D spending expensed or amortized under Sec. 174 [of the tax code] "by the amount of the taxpayers R&D credit for that year." The reduction, which eliminates the opportunity for a "double credit," would be required for taxable years beginning with 1989. The R&D credit provision in HR 4333 also outlines how companies will have to allocate R&D expenses between U.S. and foreign source income. The legislation allows companies to "allocate 64% of U.S. R&D expenses (other than any such amounts allocated to one geographical source because of legal requirements) to U.S. source income." The measure further provides for an allocation of 64% of expenses for R&D conducted outside the U.S. to foreign source income effective for taxable years beginning after June 21, 1988 and before Jan. 1, 1991. "The remainder of U.S. and foreign R&D expenses would be allocated on the basis of gross sales or gross income," the bill continues. "If the gross income method is used, the amount of R&D expenses allocated to foreign source income must be equal to at least 30% of the amount which would be allocated to foreign source income on the basis of gross sales." The provision applies to expenses claimed for taxable years beginning after Aug. 1, 1987 an before Jan. 1, 1991. A General Accounting Office report on the tax credit was requested by Rep. Donnelly (D-Mass.) and the Joint Committee on Taxation last December. In a preliminary analysis of Internal Revenue Service data for 1981-1984 submitted to Donnelly in June, GAO found that 77.6% of the total $ 4.4 bil. tax credit claimed in the tax years 1981-1984 was by corporations with assets greater than or equal to $ 250 mil. Based on a sample group of 927 large corporations that made use of the R&D tax credit from 1981-1984, only 5.8% of the total credit earned in that period went to drug companies, GAO noted. A recent report on biotechnology investment by the congressional Office of Technology Assessment suggests that one way Congress can stimulate biotech R&D investment would be to offer to startup companies a refundable R&D tax credit in the year earned. Under the current R&D tax provisions, companies can obtain a 20% credit for expenditures in excess of the average amount of R&D expenditures for the previous three years. However, the report points out, "companies that do not have a three-year expenditure base are not eligible for the R&D credit as it is currently structured." A refundable tax credit, the report suggests, "would be more valuable to biotechnology start-ups in the year earned than a tax credit carried forward in which enough taxable income would be earned to take advantage of the credit." Other policy options facing Congress, the report notes, are reinstating a 25% tax credit and making the option permanent.