The Research and Experimentation Tax Credit

October 8th, 2010 | Sources: BurrillReport

Subjects: ,

With things in Washington as politically charged as they are nowadays, it’s unlikely that any kind of tax legislation will be passed before the mid-term elections. That’s unfortunate, since many key parts of our tax code are governed by laws that will expire at the end of this year. The combination of expiring tax laws and legislative gridlock makes it tough for people and businesses to plan for things like, oh say, their future.

As an example, take President Obama’s suggestion that Congress should permanently extend the Research and Experimentation Tax Credit.

The Big O wants the credit increased by 20% for eligible US-based projects, a move that would save companies over $100 billion during the next decade. If passed, the bump would be by far the largest increase since the credit was introduced in 1981.

The Research and Experimentation Tax Credit had been extended 13 times since 1981. Last year however, Congress allowed the credit to lapse amid unprecedented partisan bickering.

“Making this provision permanent would give businesses the certainty they need to accelerate R&E investments to create jobs today and in the future,” said the White House in a press release.

Trade groups representing the pharmaceutical and life sciences industries support the R&E tax credit, but venture capitalists that fund life sciences companies are far less sanguine. In part, this is because the companies they back, who need R&E funding the most, don’t see any near-term benefits from the credit, since they typically don’t have tax liabilities to offset.

But it’s actually much worse than that for venture investors. See, the administration’s proposal pays for the credit by changing the way “carried interest” is taxed. For 30 years, carried interest has been taxed at the long term capital gains tax rate. The new proposal calls for it to be treated as ordinary income, a huge negative for venture investors. The Big O’s proposal is in effect extracting a pound of flesh from VCs in order to create a credit for companies that are attempting to kill the companies they back.

“This policy would essentially double the taxes for venture capitalists — our country’s job creators, discouraging investment in new companies at a time when Congress should be doing all it can to support the start-up ecosystem,” said the National Venture Capital Association.


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