[House Report 114-113]
[From the U.S. Government Publishing Office]
114th Congress } { Report
HOUSE OF REPRESENTATIVES
1st Session } { 114-113
====================================================================
AMERICAN RESEARCH AND COMPETITIVENESS ACT OF 2015
_______
May 14, 2015.--Committed to the Committee of the Whole House on the
State of the Union and ordered to be printed
_______
Mr. Ryan of Wisconsin, from the Committee on Ways and Means, submitted
the following
R E P O R T
together with
DISSENTING VIEWS
[To accompany H.R. 880]
[Including cost estimate of the Congressional Budget Office]
The Committee on Ways and Means, to whom was referred the
bill (H.R. 880) to amend the Internal Revenue Code of 1986 to
simplify and make permanent the research credit, having
considered the same, report favorably thereon with an amendment
and recommend that the bill as amended do pass.
CONTENTS
Page
I. SUMMARY AND BACKGROUND..........................................3
A. Purpose and Summary................................. 3
B. Background and Need for Legislation................. 4
C. Legislative History................................. 4
II. EXPLANATION OF THE BILL.........................................5
A. Research Credit Simplified and Made Permanent (sec.
41 of the Code).................................... 5
III. VOTES OF THE COMMITTEE..........................................9
IV. BUDGET EFFECTS OF THE BILL.....................................10
A. Committee Estimate of Budgetary Effects............. 10
B. Statement Regarding New Budget Authority and Tax
Expenditures Budget Authority...................... 12
C. Cost Estimate Prepared by the Congressional Budget
Office............................................. 12
V. OTHER MATTERS TO BE DISCUSSED UNDER THE RULES OF THE HOUSE.....15
A. Committee Oversight Findings and Recommendations.... 15
B. Statement of General Performance Goals and
Objectives......................................... 15
C. Information Relating to Unfunded Mandates........... 15
D. Applicability of House Rule XXI 5(b)................ 15
E. Tax Complexity Analysis............................. 15
F. Congressional Earmarks, Limited Tax Benefits, and
Limited Tariff Benefits............................ 16
G. Duplication of Federal Programs..................... 16
H. Disclosure of Directed Rule Makings................. 16
VI. CHANGES IN EXISTING LAW PROPOSED BY THE BILL, AS REPORTED......16
A. Text of Existing Law Amended or Repealed by the
Bill, as Reported.................................. 16
B. Changes in Existing Law Proposed by the Bill, as
Reported........................................... 41
VII. DISSENTING VIEWS...............................................68
The amendment is as follows:
Strike all after the enacting clause and insert the
following:
SECTION 1. SHORT TITLE.
This Act may be cited as the ``American Research and Competitiveness
Act of 2015''.
SEC. 2. RESEARCH CREDIT SIMPLIFIED AND MADE PERMANENT.
(a) In General.--Section 41(a) of the Internal Revenue Code of 1986
is amended to read as follows:
``(a) In General.--For purposes of section 38, the research credit
determined under this section for the taxable year shall be an amount
equal to the sum of--
``(1) 20 percent of so much of the qualified research
expenses for the taxable year as exceeds 50 percent of the
average qualified research expenses for the 3 taxable years
preceding the taxable year for which the credit is being
determined,
``(2) 20 percent of so much of the basic research payments
for the taxable year as exceeds 50 percent of the average basic
research payments for the 3 taxable years preceding the taxable
year for which the credit is being determined, plus
``(3) 20 percent of the amounts paid or incurred by the
taxpayer in carrying on any trade or business of the taxpayer
during the taxable year (including as contributions) to an
energy research consortium for energy research.''.
(b) Repeal of Termination.--Section 41 of such Code is amended by
striking subsection (h).
(c) Credit Allowed Against Alternative Minimum Tax in Case of
Eligible Small Business.--Section 38(c)(4)(B) of such Code is amended
by redesignating clauses (ii) through (ix) as clauses (iii) through
(x), respectively, and by inserting after clause (i) the following new
clause:
``(ii) the credit determined under section 41
for the taxable year with respect to an
eligible small business (as defined in
paragraph (5)(C), after application of rules
similar to the rules of paragraph (5)(D)),''.
(d) Conforming Amendments.--
(1) Section 41(c) of such Code is amended to read as follows:
``(c) Determination of Average Research Expenses for Prior Years.--
``(1) Special rule in case of no qualified research
expenditures in any of 3 preceding taxable years.--In any case
in which the taxpayer has no qualified research expenses in any
one of the 3 taxable years preceding the taxable year for which
the credit is being determined, the amount determined under
subsection (a)(1) for such taxable year shall be equal to 10
percent of the qualified research expenses for the taxable
year.
``(2) Consistent treatment of expenses.--
``(A) In general.--Notwithstanding whether the period
for filing a claim for credit or refund has expired for
any taxable year taken into account in determining the
average qualified research expenses, or average basic
research payments, taken into account under subsection
(a), the qualified research expenses and basic research
payments taken into account in determining such
averages shall be determined on a basis consistent with
the determination of qualified research expenses and
basic research payments, respectively, for the credit
year.
``(B) Prevention of distortions.--The Secretary may
prescribe regulations to prevent distortions in
calculating a taxpayer's qualified research expenses or
basic research payments caused by a change in
accounting methods used by such taxpayer between the
current year and a year taken into account in
determining the average qualified research expenses or
average basic research payments taken into account
under subsection (a).''.
(2) Section 41(e) of such Code is amended--
(A) by striking all that precedes paragraph (6) and
inserting the following:
``(e) Basic Research Payments.--For purposes of this section--
``(1) In general.--The term `basic research payment' means,
with respect to any taxable year, any amount paid in cash
during such taxable year by a corporation to any qualified
organization for basic research but only if--
``(A) such payment is pursuant to a written agreement
between such corporation and such qualified
organization, and
``(B) such basic research is to be performed by such
qualified organization.
``(2) Exception to requirement that research be performed by
the organization.--In the case of a qualified organization
described in subparagraph (C) or (D) of paragraph (3),
subparagraph (B) of paragraph (1) shall not apply.'',
(B) by redesignating paragraphs (6) and (7) as
paragraphs (3) and (4), respectively, and
(C) in paragraph (4), as so redesignated, by striking
subparagraphs (B) and (C) and by redesignating
subparagraphs (D) and (E) as subparagraphs (B) and (C),
respectively.
(3) Section 41(f)(3) of such Code is amended--
(A)(i) by striking ``, and the gross receipts'' in
subparagraph (A)(i) and all that follows through
``determined under clause (iii)'',
(ii) by striking clause (iii) of subparagraph (A) and
redesignating clauses (iv), (v), and (vi), thereof, as
clauses (iii), (iv), and (v), respectively,
(iii) by striking ``and (iv)'' each place it appears
in subparagraph (A)(iv) (as so redesignated) and
inserting ``and (iii)'',
(iv) by striking subclause (IV) of subparagraph
(A)(iv) (as so redesignated), by striking ``, and'' at
the end of subparagraph (A)(iv)(III) (as so
redesignated) and inserting a period, and by adding
``and'' at the end of subparagraph (A)(iv)(II) (as so
redesignated),
(v) by striking ``(A)(vi)'' in subparagraph (B) and
inserting ``(A)(v)'',
(vi) by striking ``(A)(iv)(II)'' in subparagraph
(B)(i)(II) and inserting ``(A)(iii)(II)'',
(B) by striking ``, and the gross receipts of the
predecessor,'' in subparagraph (A)(iv)(II) (as so
redesignated),
(C) by striking ``, and the gross receipts of,'' in
subparagraph (B),
(D) by striking ``, or gross receipts of,'' in
subparagraph (B)(i)(I), and
(E) by striking subparagraph (C) and inserting the
following new subparagraph:
``(C) Adjustments for basic research payments.--In
the case of basic research payments, rules similar to
the rules of subparagraph (A) and (B) shall apply.''.
(4) Section 41(f)(4) of such Code is amended by striking
``and gross receipts'' and inserting ``and basic research
payments''.
(5) Section 45C(b)(1) of such Code is amended by striking
subparagraph (D).
(6) Section 45C(c)(2) of such Code is amended--
(A) by striking ``base period research expenses'' and
inserting ``average qualified research expenses'', and
(B) by striking ``base period research expenses'' in
the heading and inserting ``average qualified research
expenses''.
(7) Section 280C(c) of such Code is amended--
(A) by striking ``basic research expenses (as defined
in section 41(e)(2))'' in paragraph (1) and inserting
``basic research payments (as defined in section
41(e)(1))'', and
(B) by striking ``basic research expenses'' in
paragraph (2)(B) and inserting ``basic research
payments''.
(e) Effective Date.--
(1) In general.--Except as provided in paragraph (2), the
amendments made by this section shall apply to taxable years
beginning after December 31, 2014.
(2) Subsection (b).--The amendment made by subsection (b)
shall apply to amounts paid or incurred after December 31,
2014.
I. SUMMARY AND BACKGROUND
A. Purpose and Summary
H.R. 880, reported by the Committee on Ways and Means,
provides a permanent simplified method for calculating the
research credit with a rate of 20 percent, replacing the
traditional 20-percent research credit calculation method. H.R.
880 also provides a permanent basic research credit and energy
research credit (both with credit rates of 20 percent), and
changes the base period for the basic research credit from a
fixed period to a three-year rolling average. Additionally,
under the bill, eligible small businesses ($50 million or less
in gross receipts) would be able to claim the credit against
alternative minimum tax (``AMT'') liability. A temporary
research credit expired for qualified expenditures made after
December 31, 2014.
B. Background and Need for Legislation
While the Committee continues actively to pursue
comprehensive tax reform as a critical means of promoting
economic growth and job creation, the Committee also believes
that it is important to provide American employers permanent,
immediate tax relief to help encourage economic growth and job
creation. By providing a permanent simplified research credit,
instead of the temporary measures enacted over the past three
decades, H.R. 880 provides much-needed certainty for
innovators, enhancing the effectiveness of the credit as an
incentive for investments in research and development. Making
the alternative simplified method the primary method for
calculating the credit also eases administrative burdens for
taxpayers and the Internal Revenue Service, eliminating
substantial amounts of recordkeeping, documentation issues, and
controversy connected with the historical base-period credit.
By increasing the alternative simplified credit from 14 percent
to 20 percent and permitting eligible small businesses to claim
the credit against AMT liability, H.R. 880 further incentivizes
critical research here in the United States.
C. Legislative History
Background
H.R. 880 was introduced on February 11, 2015, and was
referred to the Committee on Ways and Means.
Committee action
The Committee on Ways and Means marked up H.R. 880, the
American Research and Competitiveness Act of 2015, on February
12, 2015, and ordered the bill, as amended, favorably reported
(with a quorum being present).
Committee hearings
The need for a permanent simplified research credit was
discussed at no fewer than eight hearings during the 112th and
113th Congresses:
Full Committee Hearing on Fundamental Tax
Reform (January 20, 2011);
Select Revenue Measures Subcommittee Hearing
on Small Businesses and Tax Reform (March 3, 2011);
Full Committee Hearing on the Need for
Comprehensive Tax Reform to Help American Companies
Compete in the Global Market and Create Jobs for
American Workers (May 12, 2011);
Full Committee Hearing on How Other
Countries Have Used Tax Reform to Help Their Companies
Compete in the Global Market and Create Jobs (May 24,
2011);
Full Committee Hearing on How Business Tax
Reform Can Encourage Job Creation (June 2, 2011);
Full Committee Hearing on the Interaction of
Tax and Financial Accounting on Tax Reform (February 8,
2012);
Full Committee Hearing on Tax Reform and the
U.S. Manufacturing Sector (July 19, 2012); and
Full Committee Hearing on the Benefits of
Permanent Tax Policy for America's Job Creators (April
8, 2014).
II. EXPLANATION OF THE BILL
A. Research Credit Simplified and Made Permanent (sec. 41 of the Code)
PRESENT LAW
General rule
For general research expenditures, a taxpayer may claim a
research credit equal to 20 percent of the amount by which the
taxpayer's qualified research expenses for a taxable year
exceed its base amount for that year.\1\ Thus, the research
credit is generally available with respect to incremental
increases in qualified research. An alternative simplified
research credit (with a 14-percent rate and a different base
amount) may be claimed in lieu of this credit.\2\
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\1\Sec. 41(a)(1). Except where otherwise specified, all section
references are to the Internal Revenue Code of 1986, as amended (the
``Code'').
\2\Sec. 41(c)(5).
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A 20-percent research tax credit also is available with
respect to the excess of (1) 100 percent of corporate cash
expenses (including grants or contributions) paid for basic
research conducted by universities (and certain nonprofit
scientific research organizations) over (2) the sum of (a) the
greater of two minimum basic research floors plus (b) an amount
reflecting any decrease in nonresearch giving to universities
by the corporation as compared to such giving during a fixed-
base period, as adjusted for inflation.\3\ This separate credit
computation commonly is referred to as the basic research
credit.
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\3\Sec. 41(a)(2) and (e). The base period for the basic research
credit generally extends from 1981 through 1983.
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Finally, a research credit is available for a taxpayer's
expenditures on research undertaken by an energy research
consortium.\4\ This separate credit computation commonly is
referred to as the energy research credit. Unlike the other
research credits, the energy research credit applies to all
qualified expenditures, not just those in excess of a base
amount.
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\4\Sec. 41(a)(3).
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The research credit, including the basic research credit
and the energy research credit, expires for amounts paid or
incurred after December 31, 2014.\5\
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\5\Sec. 41(h).
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Computation of general research credit
The general research tax credit applies only to the extent
that the taxpayer's qualified research expenses for the current
taxable year exceed its base amount. The base amount for the
current year generally is computed by multiplying the
taxpayer's fixed-base percentage by the average amount of the
taxpayer's gross receipts for the four preceding years. If a
taxpayer both incurred qualified research expenses and had
gross receipts during each of at least three years from 1984
through 1988, then its fixed-base percentage is the ratio that
its total qualified research expenses for the 1984-1988 period
bears to its total gross receipts for that period (subject to a
maximum fixed-base percentage of 16 percent). Special rules
apply to all other taxpayers (so called start-up firms).\6\ In
computing the research credit, a taxpayer's base amount cannot
be less than 50 percent of its current-year qualified research
expenses.
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\6\The Small Business Job Protection Act of 1996 expanded the
definition of start-up firms under section 41(c)(3)(B)(i) to include
any firm if the first taxable year in which such firm had both gross
receipts and qualified research expenses began after 1983. A special
rule (enacted in 1993) is designed to gradually recompute a start-up
firm's fixed-base percentage based on its actual research experience.
Under this special rule, a start-up firm is assigned a fixed-base
percentage of three percent for each of its first five taxable years
after 1993 in which it incurs qualified research expenses. A start-up
firm's fixed-base percentage for its sixth through tenth taxable years
after 1993 in which it incurs qualified research expenses is a phased-
in ratio based on the firm's actual research experience. For all
subsequent taxable years, the taxpayer's fixed-base percentage is its
actual ratio of qualified research expenses to gross receipts for any
five years selected by the taxpayer from its fifth through tenth
taxable years after 1993. Sec. 41(c)(3)(B).
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Alternative simplified credit
The alternative simplified research credit is equal to 14
percent of qualified research expenses that exceed 50 percent
of the average qualified research expenses for the three
preceding taxable years.\7\ The rate is reduced to 6 percent if
a taxpayer has no qualified research expenses in any one of the
three preceding taxable years.\8\ An election to use the
alternative simplified credit applies to all succeeding taxable
years unless revoked with the consent of the Secretary.\9\
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\7\Sec. 41(c)(5)(A).
\8\Sec. 41(c)(5)(B).
\9\Sec. 41(c)(5)(C).
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Eligible expenses
Qualified research expenses eligible for the research tax
credit consist of: (1) in-house expenses of the taxpayer for
wages and supplies attributable to qualified research; (2)
certain time-sharing costs for computer use in qualified
research; and (3) 65 percent of amounts paid or incurred by the
taxpayer to certain other persons for qualified research
conducted on the taxpayer's behalf (so-called contract research
expenses).\10\ Notwithstanding the limitation for contract
research expenses, qualified research expenses include 100
percent of amounts paid or incurred by the taxpayer to an
eligible small business, university, or Federal laboratory for
qualified energy research.
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\10\Under a special rule, 75 percent of amounts paid to a research
consortium for qualified research are treated as qualified research
expenses eligible for the research credit (rather than 65 percent under
the general rule under section 41(b)(3) governing contract research
expenses) if (1) such research consortium is a tax-exempt organization
that is described in section 501(c)(3) (other than a private
foundation) or section 501(c)(6) and is organized and operated
primarily to conduct scientific research, and (2) such qualified
research is conducted by the consortium on behalf of the taxpayer and
one or more persons not related to the taxpayer. Sec. 41(b)(3)(C).
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To be eligible for the credit, the research not only has to
satisfy the requirements of section 174, but also must be
undertaken for the purpose of discovering information that is
technological in nature, the application of which is intended
to be useful in the development of a new or improved business
component of the taxpayer, and substantially all of the
activities of which constitute elements of a process of
experimentation for functional aspects, performance,
reliability, or quality of a business component. Research does
not qualify for the credit if substantially all of the
activities relate to style, taste, cosmetic, or seasonal design
factors.\11\ In addition, research does not qualify for the
credit if: (1) conducted after the beginning of commercial
production of the business component; (2) related to the
adaptation of an existing business component to a particular
customer's requirements; (3) related to the duplication of an
existing business component from a physical examination of the
component itself or certain other information; (4) related to
certain efficiency surveys, management function or technique,
market research, market testing, or market development, routine
data collection or routine quality control; (5) related to
software developed primarily for internal use by the taxpayer;
(6) conducted outside the United States, Puerto Rico, or any
U.S. possession; (7) in the social sciences, arts, or
humanities; or (8) funded by any grant, contract, or otherwise
by another person (or government entity).\12\
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\11\Sec. 41(d)(3).
\12\Sec. 41(d)(4).
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Relation to deduction
Deductions allowed to a taxpayer under section 174 (or any
other section) are reduced by an amount equal to 100 percent of
the taxpayer's research tax credit determined for the taxable
year.\13\ Taxpayers may alternatively elect to claim a reduced
research tax credit amount under section 41 in lieu of reducing
deductions otherwise allowed.\14\
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\13\Sec. 280C(c).
\14\Sec. 280C(c)(3).
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Specified credits allowed against alternative minimum tax
For any taxable year, the general business credit (which is
the sum of the various business credits) generally may not
exceed the excess of the taxpayer's net income tax\15\ over the
greater of (1) the taxpayer's tentative minimum tax or (2) 25
percent of so much of the taxpayer's net regular tax
liability\16\ as exceeds $25,000.\17\ Any general business
credit in excess of this limitation may be carried back one
year and forward up to 20 years.\18\ The tentative minimum tax
is an amount equal to specified rates of tax imposed on the
excess of the alternative minimum taxable income over an
exemption amount.\19\ Generally, the tentative minimum tax of a
C corporation with average annual gross receipts of less than
$7.5 million for prior 3-year periods is zero.\20\
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\15\The term net income tax means the sum of the regular tax
liability and the alternative minimum tax, reduced by the credits
allowable under sections 21 through 30D. Sec. 38(c)(1).
\16\The term net regular tax liability means the regular tax
liability reduced by the sum of certain nonrefundable personal and
other credits. Sec. 38(c)(1).
\17\Sec. 38(c)(1).
\18\Sec. 39(a)(1).
\19\See sec. 55(b). For example, assume a taxpayer has a regular
tax of $80,000, a tentative minimum tax of $100,000, and a research
credit determined under section 41 of $90,000 for a taxable year (and
no other credits). Under present law, the taxpayer's research credit is
limited to the excess of $100,000 over the greater of (1) $100,000 or
(2) $13,750 (25% of the excess of $80,000 over $25,000). Accordingly,
no research credit may be claimed ($100,000-$100,000 = $0) for the
taxable year and the taxpayer's net tax liability is $100,000. The
$90,000 research credit may be carried back or forward under the rules
applicable to the general business credit.
\20\Sec. 55(e).
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In applying the tax liability limitation to a list of
``specified credits'' that are part of the general business
credit, the tentative minimum tax is treated as being zero.\21\
Thus, the specified credits generally may offset both regular
and alternative minimum tax liability (``AMT'').
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\21\See section 38(c)(4)(B) for the list of specified credits,
which does not presently include the research credit determined under
section 41.
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For taxable years beginning in 2010, an eligible small
business was allowed to offset both the regular and AMT
liability with the general business credits determined for the
taxable year (``eligible small business credits'').\22\ For
this purpose, an eligible small business was, with respect to
any taxable year, a corporation, the stock of which was not
publicly traded, a partnership, or a sole proprietor, if the
average annual gross receipts did not exceed $50 million.\23\
Credits determined with respect to a partnership or S
corporation were not treated as eligible small business credits
by a partner or shareholder unless the partner or shareholder
met the gross receipts test for the taxable year in which the
credits were treated as current year business credits.\24\
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\22\Sec. 38(c)(5)(B).
\23\Sec. 38(c)(5)(C).
\24\Sec. 38(c)(5)(D).
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REASONS FOR CHANGE
The Committee acknowledges that research is vital to
creating jobs and economic growth. Research is the basis of new
products, services, industries, and jobs for the domestic
economy. The Committee believes that the temporary nature of
the now-expired research credit limits its effectiveness,
preventing businesses from making long-term investments in
U.S.-based research and related business operations.
Additionally, many taxpayers report that the general research
credit can be complicated to calculate and that the base period
is difficult to determine. The Committee believes that the
alternative simplified credit is a more straightforward
approach for calculating the research credit and that replacing
the general credit with the simplified method would make the
research credit more efficient and better achieve its intended
purpose of fostering domestic research and experimentation. In
addition, the Committee believes that small businesses should
have better access to and be able to benefit from the research
credit. Therefore, the Committee believes it is appropriate to
simplify and make permanent the present-law research credit, as
well as allow an eligible small business to claim it against
the AMT.
EXPLANATION OF PROVISION
The provision makes permanent the alternative simplified
method for calculating the research credit and increases the
rate to 20 percent. That is, the research credit is equal to 20
percent of qualified research expenses that exceed 50 percent
of the average qualified research expenses for the three
preceding taxable years. The rate is reduced to 10 percent if a
taxpayer has no qualified research expenses in any one of the
three preceding taxable years. The provision repeals the
traditional 20-percent research credit calculation method.
The provision also makes permanent the basic research
credit and the energy research credit (both with credit rates
of 20 percent), and changes the base period for the basic
research credit from a fixed period to a three-year rolling
average.
The provision also provides that, in the case of an
eligible small business (as defined in section 38(c)(5)(C)),
the research credit is a specified credit. Thus, the research
credits of an eligible small business may offset both regular
and AMT liability.\25\
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\25\Using the above example, under this provision, the limitation
would be the excess of $80,000 over the greater of (1) $0 or (2)
$13,750. Since $13,750 is greater than $0, the $80,000 would be reduced
by $13,750 such that the research credit limitation would be $66,250.
Hence, the taxpayer would be able to claim a research credit of $66,250
against its net income tax liability, as well as its AMT liability,
which would result in $33,250 of total tax owed ($100,000--$66,250).
The remaining $23,750 of its research credit ($90,000--$66,250) may be
carried back or forward, as applicable.
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EFFECTIVE DATE
The provision is generally effective for taxable years
beginning after December 31, 2014. The provision to make the
research credit permanent applies to amounts paid or incurred
after December 31, 2014.
III. VOTES OF THE COMMITTEE
In compliance with clause 3(b) of rule XIII of the Rules of
the House of Representatives, the following statement is made
concerning the votes of the Committee on Ways and Means in its
consideration of H.R. 880, the American Research and
Competitiveness Act of 2015, on February 12, 2015.
The vote on the motion by Mr. Brady to table Mr. Crowley's
motion to appeal the ruling of the Chair that the amendment
offered by Mr. Crowley was non-germane was agreed to by a roll
call vote of 23 yeas to 11 nays (with a quorum being present).
The vote was as follows:
----------------------------------------------------------------------------------------------------------------
Representative Yea Nay Present Representative Yea Nay Present
----------------------------------------------------------------------------------------------------------------
Mr. Ryan....................... X ........ ......... Mr. Levin........ ........ X .........
Mr. Johnson.................... X ........ ......... Mr. Rangel....... ........ X .........
Mr. Brady...................... X ........ ......... Mr. McDermott.... ........ X .........
Mr. Nunes...................... X ........ ......... Mr. Lewis........ ........ X .........
Mr. Tiberi..................... X ........ ......... Mr. Neal......... ........ ........ .........
Mr. Reichert................... X ........ ......... Mr. Becerra...... ........ ........ .........
Mr. Boustany................... X ........ ......... Mr. Doggett...... ........ X .........
Mr. Roskam..................... X ........ ......... Mr. Thompson..... ........ X .........
Mr. Price...................... ........ ........ ......... Mr. Larson....... ........ X .........
Mr. Buchanan................... X ........ ......... Mr. Blumenauer... ........ ........ .........
Mr. Smith (NE)................. X ........ ......... Mr. Kind......... ........ X .........
Mr. Schock..................... X ........ ......... Mr. Pascrell..... ........ X .........
Ms. Jenkins.................... X ........ ......... Mr. Crowley...... ........ X .........
Mr. Paulsen.................... X ........ ......... Mr. Davis........ ........ X .........
Mr. Marchant................... X ........ ......... Ms. Sanchez...... ........ ........ .........
Ms. Black...................... X ........ .........
Mr. Reed....................... X ........ .........
Mr. Young...................... X ........ .........
Mr. Kelly...................... X ........ .........
Mr. Renacci.................... X ........ .........
Mr. Meehan..................... X ........ .........
Ms. Noem....................... X ........ .........
Mr. Holding.................... X ........ .........
Mr. Smith (MO)................. X ........ .........
----------------------------------------------------------------------------------------------------------------
The Chairman's amendment in the nature of a substitute was
adopted by a voice vote (with a quorum being present).
The bill, H.R. 880, was ordered favorably reported as
amended by a roll call vote of 23 yeas to 12 nays (with a
quorum being present). The vote was as follows:
----------------------------------------------------------------------------------------------------------------
Representative Yea Nay Present Representative Yea Nay Present
----------------------------------------------------------------------------------------------------------------
Mr. Ryan....................... X ........ ......... Mr. Levin........ ........ X .........
Mr. Johnson.................... X ........ ......... Mr. Rangel....... ........ X .........
Mr. Brady...................... X ........ ......... Mr. McDermott.... ........ X .........
Mr. Nunes...................... X ........ ......... Mr. Lewis........ ........ X .........
Mr. Tiberi..................... X ........ ......... Mr. Neal......... ........ ........ .........
Mr. Reichert................... X ........ ......... Mr. Becerra...... ........ ........ .........
Mr. Boustany................... X ........ ......... Mr. Doggett...... ........ X .........
Mr. Roskam..................... X ........ ......... Mr. Thompson..... ........ X .........
Mr. Price...................... X ........ ......... Mr. Larson....... ........ X .........
Mr. Buchanan................... X ........ ......... Mr. Blumenauer... ........ X .........
Mr. Smith (NE)................. X ........ ......... Mr. Kind......... ........ X .........
Mr. Schock..................... X ........ ......... Mr. Pascrell..... ........ X .........
Ms. Jenkins.................... X ........ ......... Mr. Crowley...... ........ X .........
Mr. Paulsen.................... X ........ ......... Mr. Davis........ ........ X .........
Mr. Marchant................... X ........ ......... Ms. Sanchez...... ........ ........ .........
Ms. Black...................... X ........ .........
Mr. Reed....................... X ........ .........
Mr. Young...................... ........ ........ .........
Mr. Kelly...................... X ........ .........
Mr. Renacci.................... X ........ .........
Mr. Meehan..................... X ........ .........
Ms. Noem....................... X ........ .........
Mr. Holding.................... X ........ .........
Mr. Smith (MO)................. X ........ .........
----------------------------------------------------------------------------------------------------------------
IV. BUDGET EFFECTS OF THE BILL
A. Committee Estimate of Budgetary Effects
In compliance with clause 3(d) of rule XIII of the Rules of
the House of Representatives, the following statement is made
concerning the effects on the budget of the bill, H.R. 880, as
reported.
The bill, as reported, is estimated to have the following
effect on Federal budget receipts for fiscal years 2015-2025.
FISCAL YEARS
[Millions of dollars]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2015-20 2015-25
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
-4,716 -8,768 -11,042 -13,212 -15,270 -17,229 -19,085 -20,824 -22,577 -23,894 -24,989 -70,237 -181,609
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
NOTE: Details do not add to totals due to rounding.
Pursuant to clause 8 of rule XIII of the Rules of the House
of Representatives, the following statement is made by the
Joint Committee on Taxation with respect to the provisions of
the bill amending the Internal Revenue Code of 1986: the gross
budgetary effect (before incorporating macroeconomic effects)
in any fiscal year is less than 0.25 percent of the current
projected gross domestic product of the United States for that
fiscal year; therefore, the bill is not ``major legislation''
for purposes of requiring that the estimate include the
budgetary effects of changes in economic output, employment,
capital stock and other macroeconomic variables.
B. Statement Regarding New Budget Authority and Tax Expenditures Budget
Authority
In compliance with clause 3(c)(2) of rule XIII of the Rules
of the House of Representatives, the Committee states that the
bill involves no new or increased budget authority. The
Committee further states that the revenue-reducing tax
provision involves increased tax expenditures. (See amounts in
table in Part IV.A., above.)
C. Cost Estimate Prepared by the Congressional Budget Office
In compliance with clause 3(c)(3) of rule XIII of the Rules
of the House of Representatives, requiring a cost estimate
prepared by the CBO, the following statement by CBO is
provided.
U.S. Congress,
Congressional Budget Office,
Washington, DC, February 19, 2015.
Hon. Paul Ryan,
Chairman, Committee Ways and Means,
House of Representatives, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for H.R. 880, the American
Research and Competitiveness Act of 2015.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is Logan
Timmerhoff.
Sincerely,
Robert A. Sunshine
(For Douglas W. Elmendorf, Director).
Enclosure.
H.R. 880--American Research and Competitiveness Act of 2015
H.R. 880 would amend the Internal Revenue Code to make
permanent a modified version of the tax credit for qualified
research expenses that expired at the end of 2014. The bill
would not extend the traditional calculation method and its
associated 20 percent credit. It would, however, make permanent
the ``alternative simplified method'' for calculating the tax
credit for qualified research expenses and generally increase
the associated credit to 20 percent of those expenses that
exceed 50 percent of the average qualified research expenses
for the three preceding taxable years. Among other changes, the
bill also would make permanent a tax credit for basic research
and energy research and would change the base period for the
basic research credit from a fixed period to a three-year
rolling average.
The staff of the Joint Committee on Taxation (JCT)
estimates that enacting H.R. 880 would reduce revenues, thus
increasing federal deficits, by about $182 billion over the
2015-2025 period.
The Statutory Pay-As-You-Go Act of 2010 establishes budget-
reporting and enforcement procedures for legislation affecting
direct spending and revenues. Enacting H.R. 880 would result in
revenue losses in each year beginning in 2015. The estimated
increases in the deficit are shown in the following table.
JCT has determined that the bill contains no
intergovernmental or private-sector mandates as defined in the
Unfunded Mandates Reform Act.
The CBO staff contact for this estimate is Logan
Timmerhoff. The estimate was approved by David Weiner,
Assistant Director for Tax Analysis.
CBO ESTIMATE OF PAY-AS-YOU-GO EFFECTS FOR H.R. 880, AS ORDERED REPORTED BY THE HOUSE COMMITTEE ON WAYS AND MEANS ON FEBRUARY 12, 2015
--------------------------------------------------------------------------------------------------------------------------------------------------------
By fiscal year, in millions of dollars--
----------------------------------------------------------------------------------------------------------------------
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2015-2020 2015-2025
--------------------------------------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN THE DEFICIT
Statutory Pay-As-You-Go Impact... 4,716 8,768 11,042 13,212 15,270 17,229 19,085 20,824 22,577 23,894 24,989 70,237 181,609
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: Staff of the Joint Committee on Taxation.
Note: Components may not sum to totals because of rounding.
V. OTHER MATTERS TO BE DISCUSSED UNDER THE RULES OF THE HOUSE
A. Committee Oversight Findings and Recommendations
With respect to clause 3(c)(1) of rule XIII of the Rules of
the House of Representatives (relating to oversight findings),
the Committee advises that it was as a result of the
Committee's review of the provisions of H.R. 880 that the
Committee concluded that it is appropriate to report the bill,
as amended, favorably to the House of Representatives with the
recommendation that the bill do pass.
B. Statement of General Performance Goals and Objectives
With respect to clause 3(c)(4) of rule XIII of the Rules of
the House of Representatives, the Committee advises that the
bill contains no measure that authorizes funding, so no
statement of general performance goals and objectives for which
any measure authorizes funding is required.
C. Information Relating to Unfunded Mandates
This information is provided in accordance with section 423
of the Unfunded Mandates Reform Act of 1995 (Pub. L. No. 104-
4). The Committee has determined that the bill does not contain
Federal mandates on the private sector. The Committee has
determined that the bill does not impose a Federal
intergovernmental mandate on State, local, or tribal
governments.
D. Applicability of House Rule XXI 5(b)
Rule XXI 5(b) of the Rules of the House of Representatives
provides, in part, that ``A bill or joint resolution,
amendment, or conference report carrying a Federal income tax
rate increase may not be considered as passed or agreed to
unless so determined by a vote of not less than three-fifths of
the Members voting, a quorum being present.'' The Committee has
carefully reviewed the bill, and states that the bill does not
involve any Federal income tax rate increases within the
meaning of the rule.
E. Tax Complexity Analysis
Section 4022(b) of the Internal Revenue Service
Restructuring and Reform Act of 1998 (the ``IRS Reform Act'')
requires the staff of the Joint Committee on Taxation (in
consultation with the Internal Revenue Service and the Treasury
Department) to provide a tax complexity analysis. The
complexity analysis is required for all legislation reported by
the Senate Committee on Finance, the House Committee on Ways
and Means, or any committee of conference if the legislation
includes a provision that directly or indirectly amends the
Internal Revenue Code and has widespread applicability to
individuals or small businesses.
Pursuant to clause 3(h)(1) of rule XIII of the Rules of the
House of Representatives, the staff of the Joint Committee on
Taxation has determined that a complexity analysis is not
required under section 4022(b) of the IRS Reform Act because
the bill contains no provisions that amend the Code and that
have ``widespread applicability'' to individuals or small
businesses, within the meaning of the rule.
F. Congressional Earmarks, Limited Tax Benefits, and Limited Tariff
Benefits
With respect to clause 9 of rule XXI of the Rules of the
House of Representatives, the Committee has carefully reviewed
the provisions of the bill, and states that the provisions of
the bill do not contain any congressional earmarks, limited tax
benefits, or limited tariff benefits within the meaning of the
rule.
G. Duplication of Federal Programs
In compliance with Sec. 3(g)(2) of H. Res. 5 (114th
Congress), the Committee states that no provision of the bill
establishes or reauthorizes a program related to a program
identified in the most recent Catalog of Federal Domestic
Assistance, published pursuant to the Federal Program
Information Act (Public Law 95-220, as amended by Public Law
98-169). The Committee also states that the Government
Accountability Office has included the research tax credit in a
report to Congress pursuant to section 21 of Public Law 111-
139.
H. Disclosure of Directed Rule Makings
In compliance with Sec. 3(i) of H. Res. 5 (114th Congress),
the following statement is made concerning directed rule
makings: The Committee estimates that the bill requires no
directed rule makings within the meaning of such section.
VI. CHANGES IN EXISTING LAW PROPOSED BY THE BILL, AS REPORTED
A. Text of Existing Law Amended or Repealed by the Bill, as Reported
In compliance with clause 3(e)(1)(A) of rule XIII of the
Rules of the House of Representatives, the text of each section
proposed to be amended or repealed by the bill, as reported, is
shown below:
INTERNAL REVENUE CODE OF 1986
* * * * * * *
Subtitle A--Income Taxes
* * * * * * *
CHAPTER 1--NORMAL TAXES AND SURTAXES
* * * * * * *
Subchapter A--Determination of Tax Liability
* * * * * * *
PART IV--CREDITS AGAINST TAX
* * * * * * *
Subpart D--Business Related Credits
* * * * * * *
SEC. 38. GENERAL BUSINESS CREDIT.
(a) Allowance of Credit.--There shall be allowed as a credit
against the tax imposed by this chapter for the taxable year an
amount equal to the sum of--
(1) the business credit carryforwards carried to such
taxable year,
(2) the amount of the current year business credit,
plus
(3) the business credit carrybacks carried to such
taxable year.
(b) Current Year Business Credit.--For purposes of this
subpart, the amount of the current year business credit is the
sum of the following credits determined for the taxable year:
(1) the investment credit determined under section
46,
(2) the work opportunity credit determined under
section 51(a),
(3) the alcohol fuels credit determined under section
40(a),
(4) the research credit determined under section
41(a),
(5) the low-income housing credit determined under
section 42(a),
(6) the enhanced oil recovery credit under section
43(a),
(7) in the case of an eligible small business (as
defined in section 44(b)), the disabled access credit
determined under section 44(a),
(8) the renewable electricity production credit under
section 45(a),
(9) the empowerment zone employment credit determined
under section 1396(a),
(10) the Indian employment credit as determined under
section 45A(a),
(11) the employer social security credit determined
under section 45B(a),
(12) the orphan drug credit determined under section
45C(a),
(13) the new markets tax credit determined under
section 45D(a),
(14) in the case of an eligible employer (as defined
in section 45E(c)), the small employer pension plan
startup cost credit determined under section 45E(a),
(15) the employer-provided child care credit
determined under section 45F(a),
(16) the railroad track maintenance credit determined
under section 45G(a),
(17) the biodiesel fuels credit determined under
section 40A(a),
(18) the low sulfur diesel fuel production credit
determined under section 45H(a),
(19) the marginal oil and gas well production credit
determined under section 45I(a),
(20) the distilled spirits credit determined under
section 5011(a),
(21) the advanced nuclear power facility production
credit determined under section 45J(a),
(22) the nonconventional source production credit
determined under section 45K(a),
(23) the new energy efficient home credit determined
under section 45L(a),
(24) the energy efficient appliance credit determined
under section 45M(a),
(25) the portion of the alternative motor vehicle
credit to which section 30B(g)(1) applies,
(26) the portion of the alternative fuel vehicle
refueling property credit to which section 30C(d)(1)
applies,
(27) the Hurricane Katrina housing credit determined
under section 1400P(b),
(28) the Hurricane Katrina employee retention credit
determined under section 1400R(a),
(29) the Hurricane Rita employee retention credit
determined under section 1400R(b),
(30) the Hurricane Wilma employee retention credit
determined under section 1400R(c),
(31) the mine rescue team training credit determined
under section 45N(a),
(32) in the case of an eligible agricultural business
(as defined in section 45O(e)), the agricultural
chemicals security credit determined under section
45O(a),
(33) the differential wage payment credit determined
under section 45P(a),
(34) the carbon dioxide sequestration credit
determined under section 45Q(a)
(35) the portion of the new qualified plug-in
electric drive motor vehicle credit to which section
30D(c)(1) applies, plus
(36) the small employer health insurance credit
determined under section 45R.
(c) Limitation Based on Amount of Tax.--
(1) In general.--The credit allowed under subsection
(a) for any taxable year shall not exceed the excess
(if any) of the taxpayer's net income tax over the
greater of--
(A) the tentative minimum tax for the taxable
year, or
(B) 25 percent of so much of the taxpayer's
net regular tax liability as exceeds $25,000.
For purposes of the preceding sentence, the term ``net
income tax'' means the sum of the regular tax liability
and the tax imposed by section 55, reduced by the
credits allowable under subparts A and B of this part,
and the term ``net regular tax liability'' means the
regular tax liability reduced by the sum of the credits
allowable under subparts A and B of this part.
(2) Empowerment zone employment credit may offset 25
percent of minimum tax.--
(A) In general.--In the case of the
empowerment zone employment credit--
(i) this section and section 39 shall
be applied separately with respect to
such credit, and
(ii) for purposes of applying
paragraph (1) to such credit--
(I) 75 percent of the
tentative minimum tax shall be
substituted for the tentative
minimum tax under subparagraph
(A) thereof, and
(II) the limitation under
paragraph (1) (as modified by
subclause (I)) shall be reduced
by the credit allowed under
subsection (a) for the taxable
year (other than the
empowerment zone employment
credit, the New York Liberty
Zone business employee credit,
the eligible small business
credits, and the specified
credits).
(B) Empowerment zone employment credit.--For
purposes of this paragraph, the term
``empowerment zone employment credit'' means
the portion of the credit under subsection (a)
which is attributable to the credit determined
under section 1396 (relating to empowerment
zone employment credit).
(3) Special rules for new york liberty zone business
employee credit.--
(A) In general.--In the case of the New York
Liberty Zone business employee credit--
(i) this section and section 39 shall
be applied separately with respect to
such credit, and
(ii) in applying paragraph (1) to
such credit--
(I) the tentative minimum tax
shall be treated as being zero,
and
(II) the limitation under
paragraph (1) (as modified by
subclause (I)) shall be reduced
by the credit allowed under
subsection (a) for the taxable
year (other than the New York
Liberty Zone business employee
credit, the eligible small
business credits, and the
specified credits).
(B) New york liberty zone business employee
credit.--For purposes of this subsection, the
term ``New York Liberty Zone business employee
credit'' means the portion of work opportunity
credit under section 51 determined under
section 1400L(a).
(4) Special rules for specified credits.--
(A) In general.--In the case of specified
credits--
(i) this section and section 39 shall
be applied separately with respect to
such credits, and
(ii) in applying paragraph (1) to
such credits--
(I) the tentative minimum tax
shall be treated as being zero,
and
(II) the limitation under
paragraph (1) (as modified by
subclause (I)) shall be reduced
by the credit allowed under
subsection (a) for the taxable
year (other than the eligible
small business credits and the
specified credits).
(B) Specified credits.--For purposes of this
subsection, the term ``specified credits''
means--
(i) for taxable years beginning after
December 31, 2004, the credit
determined under section 40,
(ii) the credit determined under
section 42 to the extent attributable
to buildings placed in service after
December 31, 2007,
(iii) the credit determined under
section 45 to the extent that such
credit is attributable to electricity
or refined coal produced--
(I) at a facility which is
originally placed in service
after the date of the enactment
of this paragraph, and
(II) during the 4-year period
beginning on the date that such
facility was originally placed
in service,
(iv) the credit determined under
section 45B,
(v) the credit determined under
section 45G,
(vi) the credit determined under
section 45R,
(vii) the credit determined under
section 46 to the extent that such
credit is attributable to the energy
credit determined under section 48,
(viii) the credit determined under
section 46 to the extent that such
credit is attributable to the
rehabilitation credit under section 47,
but only with respect to qualified
rehabilitation expenditures properly
taken into account for periods after
December 31, 2007, and
(ix) the credit determined under
section 51.
(5) Special rules for eligible small business credits
in 2010.--
(A) In general.--In the case of eligible
small business credits determined in taxable
years beginning in 2010--
(i) this section and section 39 shall
be applied separately with respect to
such credits, and
(ii) in applying paragraph (1) to
such credits--
(I) the tentative minimum tax
shall be treated as being zero,
and
(II) the limitation under
paragraph (1) (as modified by
subclause (I)) shall be reduced
by the credit allowed under
subsection (a) for the taxable
year (other than the eligible
small business credits).
(B) Eligible small business credits.--For
purposes of this subsection, the term
``eligible small business credits'' means the
sum of the credits listed in subsection (b)
which are determined for the taxable year with
respect to an eligible small business. Such
credits shall not be taken into account under
paragraph (2), (3), or (4).
(C) Eligible small business.--For purposes of
this subsection, the term ``eligible small
business'' means, with respect to any taxable
year--
(i) a corporation the stock of which
is not publicly traded,
(ii) a partnership, or
(iii) a sole proprietorship, if the
average annual gross receipts of such
corporation, partnership, or sole
proprietorship for the 3-taxable-year
period preceding such taxable year does
not exceed $50,000,000. For purposes of
applying the test under the preceding
sentence, rules similar to the rules of
paragraphs (2) and (3) of section
448(c) shall apply.
(D) Treatment of partners and S corporation
shareholders.--Credits determined with respect
to a partnership or S corporation shall not be
treated as eligible small business credits by
any partner or shareholder unless such partner
or shareholder meets the gross receipts test
under subparagraph (C) for the taxable year in
which such credits are treated as current year
business credits.
(6) Special rules.--
(A) Married individuals.--In the case of a
husband or wife who files a separate return,
the amount specified under subparagraph (B) of
paragraph (1) shall be $12,500 in lieu of
$25,000. This subparagraph shall not apply if
the spouse of the taxpayer has no business
credit carryforward or carryback to, and has no
current year business credit for, the taxable
year of such spouse which ends within or with
the taxpayer's taxable year.
(B) Controlled groups.--In the case of a
controlled group, the $25,000 amount specified
under subparagraph (B) of paragraph (1) shall
be reduced for each component member of such
group by apportioning $25,000 among the
component members of such group in such manner
as the Secretary shall by regulations
prescribe. For purposes of the preceding
sentence, the term ``controlled group'' has the
meaning given to such term by section 1563(a).
(C) Limitations with respect to certain
persons.--In the case of a person described in
subparagraph (A) or (B) of section 46(e)(1) (as
in effect on the day before the date of the
enactment of the Revenue Reconciliation Act of
1990), the $25,000 amount specified under
subparagraph (B) of paragraph (1) shall equal
such person's ratable share (as determined
under section 46(e)(2) (as so in effect) of
such amount.
(D) Estates and trusts.--In the case of an
estate or trust, the $25,000 amount specified
under subparagraph (B) of paragraph (1) shall
be reduced to an amount which bears the same
ratio to $25,000 as the portion of the income
of the estate or trust which is not allocated
to beneficiaries bears to the total income of
the estate or trust.
(d) Ordering Rules.--For purposes of any provision of this
title where it is necessary to ascertain the extent to which
the credits determined under any section referred to in
subsection (b) are used in a taxable year or as a carryback or
carryforward--
(1) In general.--The order in which such credits are
used shall be determined on the basis of the order in
which they are listed in subsection (b) as of the close
of the taxable year in which the credit is used.
(2) Components of investment credit.--The order in
which the credits listed in section 46 are used shall
be determined on the basis of the order in which such
credits are listed in section 46 as of the close of the
taxable year in which the credit is used.
* * * * * * *
SEC. 41. CREDIT FOR INCREASING RESEARCH ACTIVITIES.
(a) General Rule.--For purposes of section 38, the research
credit determined under this section for the taxable year shall
be an amount equal to the sum of--
(1) 20 percent of the excess (if any) of--
(A) the qualified research expenses for the
taxable year, over
(B) the base amount,
(2) 20 percent of the basic research payments
determined under subsection (e)(1)(A), and
(3) 20 percent of the amounts paid or incurred by the
taxpayer in carrying on any trade or business of the
taxpayer during the taxable year (including as
contributions) to an energy research consortium for
energy research.
(b) Qualified Research Expenses.--For purposes of this
section--
(1) Qualified research expenses.--The term
``qualified research expenses'' means the sum of the
following amounts which are paid or incurred by the
taxpayer during the taxable year in carrying on any
trade or business of the taxpayer--
(A) in-house research expenses, and
(B) contract research expenses.
(2) In-house research expenses.--
(A) In general.--The term ``in-house research
expenses'' means--
(i) any wages paid or incurred to an
employee for qualified services
performed by such employee,
(ii) any amount paid or incurred for
supplies used in the conduct of
qualified research, and
(iii) under regulations prescribed by
the Secretary, any amount paid or
incurred to another person for the
right to use computers in the conduct
of qualified research.
Clause (iii) shall not apply to any amount to
the extent that the taxpayer (or any person
with whom the taxpayer must aggregate
expenditures under subsection (f)(1)) receives
or accrues any amount from any other person for
the right to use substantially identical
personal property.
(B) Qualified services.--The term ``qualified
services'' means services consisting of--
(i) engaging in qualified research,
or
(ii) engaging in the direct
supervision or direct support of
research activities which constitute
qualified research.
If substantially all of the services performed
by an individual for the taxpayer during the
taxable year consists of services meeting the
requirements of clause (i) or (ii), the term
``qualified services'' means all of the
services performed by such individual for the
taxpayer during the taxable year.
(C) Supplies.--The term ``supplies'' means
any tangible property other than--
(i) land or improvements to land, and
(ii) property of a character subject
to the allowance for depreciation.
(D) Wages.--
(i) In general.--The term ``wages''
has the meaning given such term by
section 3401(a).
(ii) Self-employed individuals and
owner-employees.--In the case of an
employee (within the meaning of section
401(c)(1)), the term ``wages'' includes
the earned income (as defined in
section 401(c)(2)) of such employee.
(iii) Exclusion for wages to which
work opportunity credit applies.--The
term ``wages'' shall not include any
amount taken into account in
determining the work opportunity credit
under section 51(a).
(3) Contract research expenses.--
(A) In general.--The term ``contract research
expenses'' means 65 percent of any amount paid
or incurred by the taxpayer to any person
(other than an employee of the taxpayer) for
qualified research.
(B) Prepaid amounts.--If any contract
research expenses paid or incurred during any
taxable year are attributable to qualified
research to be conducted after the close of
such taxable year, such amount shall be treated
as paid or incurred during the period during
which the qualified research is conducted.
(C) Amounts paid to certain research
consortia.--
(i) In general.--Subparagraph (A)
shall be applied by substituting ``75
percent'' for ``65 percent'' with
respect to amounts paid or incurred by
the taxpayer to a qualified research
consortium for qualified research on
behalf of the taxpayer and 1 or more
unrelated taxpayers. For purposes of
the preceding sentence, all persons
treated as a single employer under
subsection (a) or (b) of section 52
shall be treated as related taxpayers.
(ii) Qualified research consortium.--
The term ``qualified research
consortium'' means any organization
which--
(I) is described in section
501(c)(3) or 501(c)(6) and is
exempt from tax under section
501(a),
(II) is organized and
operated primarily to conduct
scientific research, and
(III) is not a private
foundation.
(D) Amounts paid to eligible small
businesses, universities, and federal
laboratories.--
(i) In general.--In the case of
amounts paid by the taxpayer to--
(I) an eligible small
business,
(II) an institution of higher
education (as defined in
section 3304(f)), or
(III) an organization which
is a Federal laboratory,
for qualified research which is energy
research, subparagraph (A) shall be
applied by substituting ``100 percent''
for ``65 percent''.
(ii) Eligible small business.--For
purposes of this subparagraph, the term
``eligible small business'' means a
small business with respect to which
the taxpayer does not own (within the
meaning of section 318) 50 percent or
more of--
(I) in the case of a
corporation, the outstanding
stock of the corporation
(either by vote or value), and
(II) in the case of a small
business which is not a
corporation, the capital and
profits interests of the small
business.
(iii) Small business.--For purposes
of this subparagraph--
(I) In general.--The term
``small business'' means, with
respect to any calendar year,
any person if the annual
average number of employees
employed by such person during
either of the 2 preceding
calendar years was 500 or
fewer. For purposes of the
preceding sentence, a preceding
calendar year may be taken into
account only if the person was
in existence throughout the
year.
(II) Startups, controlled
groups, and predecessors.--
Rules similar to the rules of
subparagraphs (B) and (D) of
section 220(c)(4) shall apply
for purposes of this clause.
(iv) Federal laboratory.--For
purposes of this subparagraph, the term
``Federal laboratory'' has the meaning
given such term by section 4(6) of the
Stevenson-Wydler Technology Innovation
Act of 1980 (15 U.S.C. 3703(6)), as in
effect on the date of the enactment of
the Energy Tax Incentives Act of 2005.
(4) Trade or business requirement disregarded for in-
house research expenses of certain startup ventures.--
In the case of in-house research expenses, a taxpayer
shall be treated as meeting the trade or business
requirement of paragraph (1) if, at the time such in-
house research expenses are paid or incurred, the
principal purpose of the taxpayer in making such
expenditures is to use the results of the research in
the active conduct of a future trade or business--
(A) of the taxpayer, or
(B) of 1 or more other persons who with the
taxpayer are treated as a single taxpayer under
subsection (f)(1).
(c) Base Amount.--
(1) In general.--The term ``base amount'' means the
product of--
(A) the fixed-base percentage, and
(B) the average annual gross receipts of the
taxpayer for the 4 taxable years preceding the
taxable year for which the credit is being
determined (hereinafter in this subsection
referred to as the ``credit year'').
(2) Minimum base amount.--In no event shall the base
amount be less than 50 percent of the qualified
research expenses for the credit year.
(3) Fixed-base percentage.--
(A) In general.--Except as otherwise provided
in this paragraph, the fixed-base percentage is
the percentage which the aggregate qualified
research expenses of the taxpayer for taxable
years beginning after December 31, 1983, and
before January 1, 1989, is of the aggregate
gross receipts of the taxpayer for such taxable
years.
(B) Start-up companies.--
(i) Taxpayers to which subparagraph
applies.--The fixed-base percentage
shall be determined under this
subparagraph if--
(I) the first taxable year in
which a taxpayer had both gross
receipts and qualified research
expenses begins after December
31, 1983, or
(II) there are fewer than 3
taxable years beginning after
December 31, 1983, and before
January 1, 1989, in which the
taxpayer had both gross
receipts and qualified research
expenses.
(ii) Fixed-base percentage.--In a
case to which this subparagraph
applies, the fixed-base percentage is--
(I) 3 percent for each of the
taxpayer's 1st 5 taxable years
beginning after December 31,
1993, for which the taxpayer
has qualified research
expenses,
(II) in the case of the
taxpayer's 6th such taxable
year, 1/6 of the percentage
which the aggregate qualified
research expenses of the
taxpayer for the 4th and 5th
such taxable years is of the
aggregate gross receipts of the
taxpayer for such years,
(III) in the case of the
taxpayer's 7th such taxable
year, 1/3 of the percentage
which the aggregate qualified
research expenses of the
taxpayer for the 5th and 6th
such taxable years is of the
aggregate gross receipts of the
taxpayer for such years,
(IV) in the case of the
taxpayer's 8th such taxable
year, 1/2 of the percentage
which the aggregate qualified
research expenses of the
taxpayer for the 5th, 6th, and
7th such taxable years is of
the aggregate gross receipts of
the taxpayer for such years,
(V) in the case of the
taxpayer's 9th such taxable
year, 2/3 of the percentage
which the aggregate qualified
research expenses of the
taxpayer for the 5th, 6th, 7th,
and 8th such taxable years is
of the aggregate gross receipts
of the taxpayer for such years,
(VI) in the case of the
taxpayer's 10th such taxable
year, 5/6 of the percentage
which the aggregate qualified
research expenses of the
taxpayer for the 5th, 6th, 7th,
8th, and 9th such taxable years
is of the aggregate gross
receipts of the taxpayer for
such years, and
(VII) for taxable years
thereafter, the percentage
which the aggregate qualified
research expenses for any 5
taxable years selected by the
taxpayer from among the 5th
through the 10th such taxable
years is of the aggregate gross
receipts of the taxpayer for
such selected years.
(iii) Treatment of de minimis amounts
of gross receipts and qualified
research expenses.--The Secretary may
prescribe regulations providing that de
minimis amounts of gross receipts and
qualified research expenses shall be
disregarded under clauses (i) and (ii).
(C) Maximum fixed-base percentage.--In no
event shall the fixed-base percentage exceed 16
percent.
(D) Rounding.--The percentages determined
under subparagraphs (A) and (B)(ii) shall be
rounded to the nearest 1/100th of 1 percent.
(4) Election of alternative incremental credit.--
(A) In general.--At the election of the
taxpayer, the credit determined under
subsection (a)(1) shall be equal to the sum
of--
(i) 3 percent of so much of the
qualified research expenses for the
taxable year as exceeds 1 percent of
the average described in subsection
(c)(1)(B) but does not exceed 1.5
percent of such average,
(ii) 4 percent of so much of such
expenses as exceeds 1.5 percent of such
average but does not exceed 2 percent
of such average, and
(iii) 5 percent of so much of such
expenses as exceeds 2 percent of such
average.
(B) Election.--An election under this
paragraph shall apply to the taxable year for
which made and all succeeding taxable years
unless revoked with the consent of the
Secretary.
(5) Election of alternative simplified credit.--
(A) In general.--At the election of the
taxpayer, the credit determined under
subsection (a)(1) shall be equal to 14 percent
(12 percent in the case of taxable years ending
before January 1, 2009) of so much of the
qualified research expenses for the taxable
year as exceeds 50 percent of the average
qualified research expenses for the 3 taxable
years preceding the taxable year for which the
credit is being determined.
(B) Special rule in case of no qualified
research expenses in any of 3 preceding taxable
years.--
(i) Taxpayers to which subparagraph
applies.--The credit under this
paragraph shall be determined under
this subparagraph if the taxpayer has
no qualified research expenses in any
one of the 3 taxable years preceding
the taxable year for which the credit
is being determined.
(ii) Credit rate.--The credit
determined under this subparagraph
shall be equal to 6 percent of the
qualified research expenses for the
taxable year.
(C) Election.--An election under this
paragraph shall apply to the taxable year for
which made and all succeeding taxable years
unless revoked with the consent of the
Secretary. An election under this paragraph may
not be made for any taxable year to which an
election under paragraph (4) applies.
(6) Consistent treatment of expenses required.--
(A) In general.--Notwithstanding whether the
period for filing a claim for credit or refund
has expired for any taxable year taken into
account in determining the fixed-base
percentage, the qualified research expenses
taken into account in computing such percentage
shall be determined on a basis consistent with
the determination of qualified research
expenses for the credit year.
(B) Prevention of distortions.--The Secretary
may prescribe regulations to prevent
distortions in calculating a taxpayer's
qualified research expenses or gross receipts
caused by a change in accounting methods used
by such taxpayer between the current year and a
year taken into account in computing such
taxpayer's fixed-base percentage.
(7) Gross receipts.--For purposes of this subsection,
gross receipts for any taxable year shall be reduced by
returns and allowances made during the taxable year. In
the case of a foreign corporation, there shall be taken
into account only gross receipts which are effectively
connected with the conduct of a trade or business
within the United States, the Commonwealth of Puerto
Rico, or any possession of the United States.
(d) Qualified Research Defined.--For purposes of this
section--
(1) In general.--The term ``qualified research''
means research--
(A) with respect to which expenditures may be
treated as expenses under section 174,
(B) which is undertaken for the purpose of
discovering information--
(i) which is technological in nature,
and
(ii) the application of which is
intended to be useful in the
development of a new or improved
business component of the taxpayer, and
(C) substantially all of the activities of
which constitute elements of a process of
experimentation for a purpose described in
paragraph (3).
Such term does not include any activity described in
paragraph (4).
(2) Tests to be applied separately to each business
component.--For purposes of this subsection--
(A) In general.--Paragraph (1) shall be
applied separately with respect to each
business component of the taxpayer.
(B) Business component defined.--The term
``business component'' means any product,
process, computer software, technique, formula,
or invention which is to be--
(i) held for sale, lease, or license,
or
(ii) used by the taxpayer in a trade
or business of the taxpayer.
(C) Special rule for production processes.--
Any plant process, machinery, or technique for
commercial production of a business component
shall be treated as a separate business
component (and not as part of the business
component being produced).
(3) Purposes for which research may qualify for
credit.--For purposes of paragraph (1)(C)--
(A) In general.--Research shall be treated as
conducted for a purpose described in this
paragraph if it relates to--
(i) a new or improved function,
(ii) performance, or
(iii) reliability or quality.
(B) Certain purposes not qualified.--Research
shall in no event be treated as conducted for a
purpose described in this paragraph if it
relates to style, taste, cosmetic, or seasonal
design factors.
(4) Activities for which credit not allowed.--The
term ``qualified research'' shall not include any of
the following:
(A) Research after commercial production.--
Any research conducted after the beginning of
commercial production of the business
component.
(B) Adaptation of existing business
components.--Any research related to the
adaptation of an existing business component to
a particular customer's requirement or need.
(C) Duplication of existing business
component.--Any research related to the
reproduction of an existing business component
(in whole or in part) from a physical
examination of the business component itself or
from plans, blueprints, detailed
specifications, or publicly available
information with respect to such business
component.
(D) Surveys, studies, etc..--Any--
(i) efficiency survey,
(ii) activity relating to management
function or technique,
(iii) market research, testing, or
development (including advertising or
promotions),
(iv) routine data collection, or
(v) routine or ordinary testing or
inspection for quality control.
(E) Computer software.--Except to the extent
provided in regulations, any research with
respect to computer software which is developed
by (or for the benefit of) the taxpayer
primarily for internal use by the taxpayer,
other than for use in--
(i) an activity which constitutes
qualified research (determined with
regard to this subparagraph), or
(ii) a production process with
respect to which the requirements of
paragraph (1) are met.
(F) Foreign research.--Any research conducted
outside the United States, the Commonwealth of
Puerto Rico, or any possession of the United
States.
(G) Social sciences, etc..--Any research in
the social sciences, arts, or humanities.
(H) Funded research.--Any research to the
extent funded by any grant, contract, or
otherwise by another person (or governmental
entity).
(e) Credit Allowable With Respect to Certain Payments to
Qualified Organizations for Basic Research.--For purposes of
this section--
(1) In general.--In the case of any taxpayer who
makes basic research payments for any taxable year--
(A) the amount of basic research payments
taken into account under subsection (a)(2)
shall be equal to the excess of--
(i) such basic research payments,
over
(ii) the qualified organization base
period amount, and
(B) that portion of such basic research
payments which does not exceed the qualified
organization base period amount shall be
treated as contract research expenses for
purposes of subsection (a)(1).
(2) Basic research payments defined.--For purposes of
this subsection--
(A) In general.--The term ``basic research
payment'' means, with respect to any taxable
year, any amount paid in cash during such
taxable year by a corporation to any qualified
organization for basic research but only if--
(i) such payment is pursuant to a
written agreement between such
corporation and such qualified
organization, and
(ii) such basic research is to be
performed by such qualified
organization.
(B) Exception to requirement that research be
performed by the organization.--In the case of
a qualified organization described in
subparagraph (C) or (D) of paragraph (6),
clause (ii) of subparagraph (A) shall not
apply.
(3) Qualified organization base period amount.--For
purposes of this subsection, the term ``qualified
organization base period amount'' means an amount equal
to the sum of--
(A) the minimum basic research amount, plus
(B) the maintenance-of-effort amount.
(4) Minimum basic research amount.--For purposes of
this subsection--
(A) In general.--The term ``minimum basic
research amount'' means an amount equal to the
greater of--
(i) 1 percent of the average of the
sum of amounts paid or incurred during
the base period for--
(I) any in-house research
expenses, and
(II) any contract research
expenses, or
(ii) the amounts treated as contract
research expenses during the base
period by reason of this subsection (as
in effect during the base period).
(B) Floor amount.--Except in the case of a
taxpayer which was in existence during a
taxable year (other than a short taxable year)
in the base period, the minimum basic research
amount for any base period shall not be less
than 50 percent of the basic research payments
for the taxable year for which a determination
is being made under this subsection.
(5) Maintenance-of-effort amount.--For purposes of
this subsection--
(A) In general.--The term ``maintenance-of-
effort amount'' means, with respect to any
taxable year, an amount equal to the excess (if
any) of--
(i) an amount equal to--
(I) the average of the
nondesignated university
contributions paid by the
taxpayer during the base
period, multiplied by
(II) the cost-of-living
adjustment for the calendar
year in which such taxable year
begins, over (ii) the amount of
nondesignated university
contributions paid by the
taxpayer during such taxable
year.
(B) Nondesignated university contributions.--
For purposes of this paragraph, the term
``nondesignated university contribution'' means
any amount paid by a taxpayer to any qualified
organization described in paragraph (6)(A)--
(i) for which a deduction was
allowable under section 170, and
(ii) which was not taken into
account--
(I) in computing the amount
of the credit under this
section (as in effect during
the base period) during any
taxable year in the base
period, or
(II) as a basic research
payment for purposes of this
section.
(C) Cost-of-living adjustment defined.--
(i) In general.--The cost-of-living
adjustment for any calendar year is the
cost-of-living adjustment for such
calendar year determined under section
1(f)(3), by substituting ``calendar
year 1987'' for ``calendar year 1992''
in subparagraph (B) thereof.
(ii) Special rule where base period
ends in a calendar year other than 1983
or 1984.--If the base period of any
taxpayer does not end in 1983 or 1984,
section 1(f)(3)(B) shall, or purposes
of this paragraph, be applied by
substituting the calendar year in which
such base period ends for 1992. Such
substitution shall be in lieu of the
substitution under clause (i).
(6) Qualified organization.--For purposes of this
subsection, the term ``qualified organization'' means
any of the following organizations:
(A) Educational institutions.--Any
educational organization which--
(i) is an institution of higher
education (within the meaning of
section 3304(f)), and
(ii) is described in section
170(b)(1)(A)(ii).
(B) Certain scientific research
organizations.--Any organization not described
in subparagraph (A) which--
(i) is described in section 501(c)(3)
and is exempt from tax under section
501(a),
(ii) is organized and operated
primarily to conduct scientific
research, and
(iii) is not a private foundation.
(C) Scientific tax-exempt organizations.--Any
organization which--
(i) is described in--
(I) section 501(c)(3) (other
than a private foundation), or
(II) section 501(c)(6),
(ii) is exempt from tax under section
501(a),
(iii) is organized and operated
primarily to promote scientific
research by qualified organizations
described in subparagraph (A) pursuant
to written research agreements, and
(iv) currently expends--
(I) substantially all of its
funds, or
(II) substantially all of the
basic research payments
received by it,
for grants to, or contracts for basic
research with, an organization
described in subparagraph (A).
(D) Certain grant organizations.--Any
organization not described in subparagraph (B)
or (C) which--
(i) is described in section 501(c)(3)
and is exempt from tax under section
501(a) (other than a private
foundation),
(ii) is established and maintained by
an organization established before July
10, 1981, which meets the requirements
of clause (i),
(iii) is organized and operated
exclusively for the purpose of making
grants to organizations described in
subparagraph (A) pursuant to written
research agreements for purposes of
basic research, and
(iv) makes an election, revocable
only with the consent of the Secretary,
to be treated as a private foundation
for purposes of this title (other than
section 4940, relating to excise tax
based on investment income).
(7) Definitions and special rules.--For purposes of
this subsection--
(A) Basic research.--The term ``basic
research'' means any original investigation for
the advancement of scientific knowledge not
having a specific commercial objective, except
that such term shall not include--
(i) basic research conducted outside
of the United States, and
(ii) basic research in the social
sciences, arts, or humanities.
(B) Base period.--The term ``base period''
means the 3-taxable-year period ending with the
taxable year immediately preceding the 1st
taxable year of the taxpayer beginning after
December 31, 1983.
(C) Exclusion from incremental credit
calculation.--For purposes of determining the
amount of credit allowable under subsection
(a)(1) for any taxable year, the amount of the
basic research payments taken into account
under subsection (a)(2)--
(i) shall not be treated as qualified
research expenses under subsection
(a)(1)(A), and
(ii) shall not be included in the
computation of base amount under
subsection (a)(1)(B).
(D) Trade or business qualification.--For
purposes of applying subsection (b)(1) to this
subsection, any basic research payments shall
be treated as an amount paid in carrying on a
trade or business of the taxpayer in the
taxable year in which it is paid (without
regard to the provisions of subsection
(b)(3)(B)).
(E) Certain corporations not eligible.--The
term ``corporation'' shall not include--
(i) an S corporation,
(ii) a personal holding company (as
defined in section 542), or
(iii) a service organization (as
defined in section 414(m)(3)).
(f) Special Rules.--For purposes of this section--
(1) Aggregation of expenditures.--
(A) Controlled group of corporations.--In
determining the amount of the credit under this
section--
(i) all members of the same
controlled group of corporations shall
be treated as a single taxpayer, and
(ii) the credit (if any) allowable by
this section to each such member shall
be determined on a proportionate basis
to its share of the aggregate of the
qualified research expenses, basic
research payments, and amounts paid or
incurred to energy research
consortiums, taken into account by such
controlled group for purposes of this
section.
(B) Common control.--Under regulations
prescribed by the Secretary, in determining the
amount of the credit under this section--
(i) all trades or businesses (whether
or not incorporated) which are under
common control shall be treated as a
single taxpayer, and
(ii) the credit (if any) allowable by
this section to each such person shall
be determined on a proportionate basis
to its share of the aggregate of the
qualified research expenses, basic
research payments, and amounts paid or
incurred to energy research
consortiums, taken into account by all
such persons under common control for
purposes of this section.
The regulations prescribed under this
subparagraph shall be based on principles
similar to the principles which apply in the
case of subparagraph (A).
(2) Allocations.--
(A) Pass-thru in the case of estates and
trusts.--Under regulations prescribed by the
Secretary, rules similar to the rules of
subsection (d) of section 52 shall apply.
(B) Allocation in the case of partnerships.--
In the case of partnerships, the credit shall
be allocated among partners under regulations
prescribed by the Secretary.
(3) Adjustments for certain acquisitions, etc..--
Under regulations prescribed by the Secretary--
(A) Acquisitions.--
(i) In general.--If a person acquires
the major portion of either a trade or
business or a separate unit of a trade
or business (hereinafter in this
paragraph referred to as the ``acquired
business'') of another person
(hereinafter in this paragraph referred
to as the ``predecessor''), then the
amount of qualified research expenses
paid or incurred by the acquiring
person during the measurement period
shall be increased by the amount
determined under clause (ii), and the
gross receipts of the acquiring person
for such period shall be increased by
the amount determined under clause
(iii).
(ii) Amount determined with respect
to qualified research expenses.--The
amount determined under this clause
is--
(I) for purposes of applying
this section for the taxable
year in which such acquisition
is made, the acquisition year
amount, and
(II) for purposes of applying
this section for any taxable
year after the taxable year in
which such acquisition is made,
the qualified research expenses
paid or incurred by the
predecessor with respect to the
acquired business during the
measurement period.
(iii) Amount determined with respect
to gross receipts.--The amount
determined under this clause is the
amount which would be determined under
clause (ii) if ``the gross receipts
of'' were substituted for ``the
qualified research expenses paid or
incurred by'' each place it appears in
clauses (ii) and (iv).
(iv) Acquisition year amount.--For
purposes of clause (ii), the
acquisition year amount is the amount
equal to the product of--
(I) the qualified research
expenses paid or incurred by
the predecessor with respect to
the acquired business during
the measurement period, and
(II) the number of days in
the period beginning on the
date of the acquisition and
ending on the last day of the
taxable year in which the
acquisition is made,
divided by the number of days in the
acquiring person's taxable year.
(v) Special rules for coordinating
taxable years.--In the case of an
acquiring person and a predecessor
whose taxable years do not begin on the
same date--
(I) each reference to a
taxable year in clauses (ii)
and (iv) shall refer to the
appropriate taxable year of the
acquiring person,
(II) the qualified research
expenses paid or incurred by
the predecessor, and the gross
receipts of the predecessor,
during each taxable year of the
predecessor any portion of
which is part of the
measurement period shall be
allocated equally among the
days of such taxable year,
(III) the amount of such
qualified research expenses
taken into account under
clauses (ii) and (iv) with
respect to a taxable year of
the acquiring person shall be
equal to the total of the
expenses attributable under
subclause (II) to the days
occurring during such taxable
year, and
(IV) the amount of such gross
receipts taken into account
under clause (iii) with respect
to a taxable year of the
acquiring person shall be equal
to the total of the gross
receipts attributable under
subclause (II) to the days
occurring during such taxable
year.
(vi) Measurement period.--For
purposes of this subparagraph, the term
``measurement period'' means, with
respect to the taxable year of the
acquiring person for which the credit
is determined, any period of the
acquiring person preceding such taxable
year which is taken into account for
purposes of determining the credit for
such year.
(B) Dispositions.--If the predecessor
furnished to the acquiring person such
information as is necessary for the application
of subparagraph (A), then, for purposes of
applying this section for any taxable year
ending after such disposition, the amount of
qualified research expenses paid or incurred
by, and the gross receipts of, the predecessor
during the measurement period (as defined in
subparagraph (A)(vi), determined by
substituting ``predecessor'' for ``acquiring
person'' each place it appears) shall be
reduced by--
(i) in the case of the taxable year
in which such disposition is made, an
amount equal to the product of--
(I) the qualified research
expenses paid or incurred by,
or gross receipts of, the
predecessor with respect to the
acquired business during the
measurement period (as so
defined and so determined), and
(II) the number of days in
the period beginning on the
date of acquisition (as
determined for purposes of
subparagraph (A)(iv)(II)) and
ending on the last day of the
taxable year of the predecessor
in which the disposition is
made,
divided by the number of days in the
taxable year of the predecessor, and
(ii) in the case of any taxable year
ending after the taxable year in which
such disposition is made, the amount
described in clause (i)(I).
(C) Certain reimbursements taken into account
in determining fixed-base percentage.--If
during any of the 3 taxable years following the
taxable year in which a disposition to which
subparagraph (B) applies occurs, the disposing
taxpayer (or a person with whom the taxpayer is
required to aggregate expenditures under
paragraph (1)) reimburses the acquiring person
(or a person required to so aggregate
expenditures with such person) for research on
behalf of the taxpayer, then the amount of
qualified research expenses of the taxpayer for
the taxable years taken into account in
computing the fixed-base percentage shall be
increased by the lesser of--
(i) the amount of the decrease under
subparagraph (B) which is allocable to
taxable years so taken into account, or
(ii) the product of the number of
taxable years so taken into account,
multiplied by the amount of the
reimbursement described in this
subparagraph.
(4) Short taxable years.--In the case of any short
taxable year, qualified research expenses and gross
receipts shall be annualized in such circumstances and
under such methods as the Secretary may prescribe by
regulation.
(5) Controlled group of corporations.--The term
``controlled group of corporations'' has the same
meaning given to such term by section 1563(a), except
that--
(A) ``more than 50 percent'' shall be
substituted for ``at least 80 percent'' each
place it appears in section 1563(a)(1), and
(B) the determination shall be made without
regard to subsections (a)(4) and (e)(3)(C) of
section 1563.
(6) Energy research consortium.--
(A) In general.--The term ``energy research
consortium'' means any organization--
(i) which is--
(I) described in section
501(c)(3) and is exempt from
tax under section 501(a) and is
organized and operated
primarily to conduct energy
research, or
(II) organized and operated
primarily to conduct energy
research in the public interest
(within the meaning of section
501(c)(3)),
(ii) which is not a private
foundation,
(iii) to which at least 5 unrelated
persons paid or incurred during the
calendar year in which the taxable year
of the organization begins amounts
(including as contributions) to such
organization for energy research, and
(iv) to which no single person paid
or incurred (including as
contributions) during such calendar
year an amount equal to more than 50
percent of the total amounts received
by such organization during such
calendar year for energy research.
(B) Treatment of persons.--All persons
treated as a single employer under subsection
(a) or (b) of section 52 shall be treated as
related persons for purposes of subparagraph
(A)(iii) and as a single person for purposes of
subparagraph (A)(iv).
(C) Foreign research.--For purposes of
subsection (a)(3), amounts paid or incurred for
any energy research conducted outside the
United States, the Commonwealth of Puerto Rico,
or any possession of the United States shall
not be taken into account.
(D) Denial of double benefit.--Any amount
taken into account under subsection (a)(3)
shall not be taken into account under paragraph
(1) or (2) of subsection (a).
(E) Energy research.--The term ``energy
research'' does not include any research which
is not qualified research.
(g) Special Rule for Pass-Thru of Credit.--In the case of an
individual who--
(1) owns an interest in an unincorporated trade or
business,
(2) is a partner in a partnership,
(3) is a beneficiary of an estate or trust, or
(4) is a shareholder in an S corporation,
the amount determined under subsection (a) for any taxable year
shall not exceed an amount (separately computed with respect to
such person's interest in such trade or business or entity)
equal to the amount of tax attributable to that portion of a
person's taxable income which is allocable or apportionable to
the person's interest in such trade or business or entity. If
the amount determined under subsection (a) for any taxable year
exceeds the limitation of the preceding sentence, such amount
may be carried to other taxable years under the rules of
section 39; except that the limitation of the preceding
sentence shall be taken into account in lieu of the limitation
of section 38(c) in applying section 39.
(h) Termination.--
(1) In general.--This section shall not apply to any
amount paid or incurred after December 31, 2014.
(2) Termination of alternative incremental credit.--
No election under subsection (c)(4) shall apply to
taxable years beginning after December 31, 2008.
(2) Computation for taxable year in which credit
terminates.--In the case of any taxable year with
respect to which this section applies to a number of
days which is less than the total number of days in
such taxable year--
(A) the amount determined under subsection
(c)(1)(B) with respect to such taxable year
shall be the amount which bears the same ratio
to such amount (determined without regard to
this paragraph) as the number of days in such
taxable year to which this section applies
bears to the total number of days in such
taxable year, and
(B) for purposes of subsection (c)(5), the
average qualified research expenses for the
preceding 3 taxable years shall be the amount
which bears the same ratio to such average
qualified research expenses (determined without
regard to this paragraph) as the number of days
in such taxable year to which this section
applies bears to the total number of days in
such taxable year.
* * * * * * *
SEC. 45C. CLINICAL TESTING EXPENSES FOR CERTAIN DRUGS FOR RARE DISEASES
OR CONDITIONS.
(a) General Rule.--For purposes of section 38, the credit
determined under this section for the taxable year is an amount
equal to 50 percent of the qualified clinical testing expenses
for the taxable year.
(b) Qualified Clinical Testing Expenses.--For purposes of
this section--
(1) Qualified clinical testing expenses.--
(A) In general.--Except as otherwise provided
in this paragraph, the term ``qualified
clinical testing expenses'' means the amounts
which are paid or incurred by the taxpayer
during the taxable year which would be
described in subsection (b) of section 41 if
such subsection were applied with the
modifications set forth in subparagraph (B).
(B) Modifications.--For purposes of
subparagraph (A), subsection (b) of section 41
shall be applied--
(i) by substituting ``clinical
testing'' for ``qualified research''
each place it appears in paragraphs (2)
and (3) of such subsection, and
(ii) by substituting ``100 percent''
for ``65 percent'' in paragraph (3)(A)
of such subsection.
(C) Exclusion for amounts funded by grants,
etc.--The term ``qualified clinical testing
expenses'' shall not include any amount to the
extent such amount is funded by any grant,
contract, or otherwise by another person (or
any governmental entity).
(D) Special rule.--If section 41 is not in
effect for any period, such section shall be
deemed to remain in effect for such period for
purposes of this paragraph.
(2) Clinical testing.--
(A) In general.--The term ``clinical
testing'' means any human clinical testing--
(i) which is carried out under an
exemption for a drug being tested for a
rare disease or condition under section
505(i) of the Federal Food, Drug, and
Cosmetic Act (or regulations issued
under such section),
(ii) which occurs--
(I) after the date such drug
is designated under section 526
of such Act, and
(II) before the date on which
an application with respect to
such drug is approved under
section 505(b) of such Act or,
if the drug is a biological
product, before the date on
which a license for such drug
is issued under section 351 of
the Public Health Service Act;
and
(iii) which is conducted by or on
behalf of the taxpayer to whom the
designation under such section 526
applies.
(B) Testing must be related to use for rare
disease or condition.--Human clinical testing
shall be taken into account under subparagraph
(A) only to the extent such testing is related
to the use of a drug for the rare disease or
condition for which it was designated under
section 526 of the Federal Food, Drug, and
Cosmetic Act.
(c) Coordination With Credit for Increasing Research
Expenditures.--
(1) In general.--Except as provided in paragraph (2),
any qualified clinical testing expenses for a taxable
year to which an election under this section applies
shall not be taken into account for purposes of
determining the credit allowable under section 41 for
such taxable year.
(2) Expenses included in determining base period
research expenses.--Any qualified clinical testing
expenses for any taxable year which are qualified
research expenses (within the meaning of section 41(b))
shall be taken into account in determining base period
research expenses for purposes of applying section 41
to subsequent taxable years.
(d) Definition and Special Rules.--
(1) Rare disease or condition.--For purposes of this
section, the term ``rare disease or condition'' means
any disease or condition which--
(A) affects less than 200,000 persons in the
United States, or
(B) affects more than 200,000 persons in the
United States but for which there is no
reasonable expectation that the cost of
developing and making available in the United
States a drug for such disease or condition
will be recovered from sales in the United
States of such drug.
Determinations under the preceding sentence with
respect to any drug shall be made on the basis of the
facts and circumstances as of the date such drug is
designated under section 526 of the Federal Food, Drug,
and Cosmetic Act.
(2) Special limitations on foreign testing.--
(A) In general.--No credit shall be allowed
under this section with respect to any clinical
testing conducted outside the United States
unless--
(i) such testing is conducted outside
the United States because there is an
insufficient testing population in the
United States, and
(ii) such testing is conducted by a
United States person or by any other
person who is not related to the
taxpayer to whom the designation under
section 526 of the Federal Food, Drug,
and Cosmetic Act applies.
(B) Special limitation for corporations to
which section 936 applies.--No credit shall be
allowed under this section with respect to any
clinical testing conducted by a corporation to
which an election under section 936 applies.
(3) Certain rules made applicable.--Rules similar to
the rules of paragraphs (1) and (2) of section 41(f)
shall apply for purposes of this section.
(4) Election.--This section shall apply to any
taxpayer for any taxable year only if such taxpayer
elects (at such time and in such manner as the
Secretary may by regulations prescribe) to have this
section apply for such taxable year.
* * * * * * *
Subchapter B--Computation of Taxable Income
* * * * * * *
PART IX--ITEMS NOT DEDUCTIBLE
* * * * * * *
SEC. 280C. CERTAIN EXPENSES FOR WHICH CREDITS ARE ALLOWABLE.
(a) Rule for Employment Credits.--No deduction shall be
allowed for that portion of the wages or salaries paid or
incurred for the taxable year which is equal to the sum of the
credits determined for the taxable year under sections 45A(a),
45P(a), 51(a), and 1396(a), 1400P(b), and 1400R. In the case of
a corporation which is a member of a controlled group of
corporations (within the meaning of section 52(a)) or a trade
or business which is treated as being under common control with
other trades or businesses (within the meaning of section
52(b)), this subsection shall be applied under rules prescribed
by the Secretary similar to the rules applicable under
subsections (a) and (b) of section 52.
(b) Credit for Qualified Clinical Testing Expenses for
Certain Drugs.--
(1) In general.--No deduction shall be allowed for
that portion of the qualified clinical testing expenses
(as defined in section 45C(b)) otherwise allowable as a
deduction for the taxable year which is equal to the
amount of the credit allowable for the taxable year
under section 45C (determined without regard to section
38(c)).
(2) Similar rule where taxpayer capitalizes rather
than deducts expenses.--If--
(A) the amount of the credit allowable for
the taxable year under section 45C (determined
without regard to section 38(c)), exceeds
(B) the amount allowable as a deduction for
the taxable year for qualified clinical testing
expenses (determined without regard to
paragraph (1)),
the amount chargeable to capital account for the
taxable year for such expenses shall be reduced by the
amount of such excess.
(3) Controlled groups.--In the case of a corporation
which is a member of a controlled group of corporations
(within the meaning of section 41(f)(5)) or a trade or
business which is treated as being under common control
with other trades or business (within the meaning of
section 41(f)(1)(B)), this subsection shall be applied
under rules prescribed by the Secretary similar to the
rules applicable under subparagraphs (A) and (B) of
section 41(f)(1).
(c) Credit for Increasing Research Activities.--
(1) In general.--No deduction shall be allowed for
that portion of the qualified research expenses (as
defined in section 41(b)) or basic research expenses
(as defined in section 41(e)(2)) otherwise allowable as
a deduction for the taxable year which is equal to the
amount of the credit determined for such taxable year
under section 41(a).
(2) Similar rule where taxpayer capitalizes rather
than deducts expenses.--If--
(A) the amount of the credit determined for
the taxable year under section 41(a)(1),
exceeds
(B) the amount allowable as a deduction for
such taxable year for qualified research
expenses or basic research expenses (determined
without regard to paragraph (1)),
the amount chargeable to capital account for the
taxable year for such expenses shall be reduced by the
amount of such excess.
(3) Election of reduced credit.--
(A) In general.--In the case of any taxable
year for which an election is made under this
paragraph--
(i) paragraphs (1) and (2) shall not
apply, and
(ii) the amount of the credit under
section 41(a) shall be the amount
determined under subparagraph (B).
(B) Amount of reduced credit.--The amount of
credit determined under this subparagraph for
any taxable year shall be the amount equal to
the excess of--
(i) the amount of credit determined
under section 41(a) without regard to
this paragraph, over
(ii) the product of--
(I) the amount described in
clause (i), and
(II) the maximum rate of tax
under section 11(b)(1).
(C) Election.--An election under this
paragraph for any taxable year shall be made
not later than the time for filing the return
of tax for such year (including extensions),
shall be made on such return, and shall be made
in such manner as the Secretary may prescribe.
Such an election, once made, shall be
irrevocable.
(4) Controlled groups.--Paragraph (3) of subsection
(b) shall apply for purposes of this subsection.
(d) Credit for Low Sulfur Diesel Fuel Production.--The
deductions otherwise allowed under this chapter for the taxable
year shall be reduced by the amount of the credit determined
for the taxable year under section 45H(a).
(e) Mine Rescue Team Training Credit.--No deduction shall be
allowed for that portion of the expenses otherwise allowable as
a deduction for the taxable year which is equal to the amount
of the credit determined for the taxable year under section
45N(a).
(f) Credit for Security of Agricultural Chemicals.--No
deduction shall be allowed for that portion of the expenses
otherwise allowable as a deduction taken into account in
determining the credit under section 45O for the taxable year
which is equal to the amount of the credit determined for such
taxable year under section 45O(a).
(g) Credit for Health Insurance Premiums.--
No deduction shall be allowed for the portion of the
premiums paid by the taxpayer for coverage of 1 or more
individuals under a qualified health plan which is equal to the
amount of the credit determined for the taxable year under
section 36B(a) with respect to such premiums.
(h) Credit for Employee Health Insurance Expenses of Small
Employers.--No deduction shall be allowed for that portion of
the premiums for qualified health plans (as defined in section
1301(a) of the Patient Protection and Affordable Care Act), or
for health insurance coverage in the case of taxable years
beginning in 2010, 2011, 2012, or 2013, paid by an employer
which is equal to the amount of the credit determined under
section 45R(a) with respect to the premiums.
(g) Qualifying Therapeutic Discovery Project Credit.--
(1) In general.--No deduction shall be allowed for
that portion of the qualified investment (as defined in
section 48D(b)) otherwise allowable as a deduction for
the taxable year which--
(A) would be qualified research expenses (as
defined in section 41(b)), basic research
expenses (as defined in section 41(e)(2)), or
qualified clinical testing expenses (as defined
in section 45C(b)) if the credit under section
41 or section 45C were allowed with respect to
such expenses for such taxable year, and
(B) is equal to the amount of the credit
determined for such taxable year under section
48D(a), reduced by--
(i) the amount disallowed as a
deduction by reason of section
48D(e)(2)(B), and
(ii) the amount of any basis
reduction under section 48D(e)(1).
(2) Similar rule where taxpayer capitalizes rather
than deducts expenses.--In the case of expenses
described in paragraph (1)(A) taken into account in
determining the credit under section 48D for the
taxable year, if--
(A) the amount of the portion of the credit
determined under such section with respect to
such expenses, exceeds
(B) the amount allowable as a deduction for
such taxable year for such expenses (determined
without regard to paragraph (1)),
the amount chargeable to capital account for the
taxable year for such expenses shall be reduced by the
amount of such excess.
(3) Controlled groups.--Paragraph (3) of subsection
(b) shall apply for purposes of this subsection.
* * * * * * *
B. Changes in Existing Law Proposed by the Bill, as Reported
In compliance with clause 3(e)(1)(B) of rule XIII of the
Rules of the House of Representatives, changes in existing law
proposed by the bill, as reported, are shown as follows
(existing law proposed to be omitted is enclosed in black
brackets, new matter is printed in italic, existing law in
which no change is proposed is shown in roman):
INTERNAL REVENUE CODE OF 1986
* * * * * * *
Subtitle A--Income Taxes
* * * * * * *
CHAPTER 1--NORMAL TAXES AND SURTAXES
* * * * * * *
Subchapter A--Determination of Tax Liability
* * * * * * *
PART IV--CREDITS AGAINST TAX
* * * * * * *
Subpart D--Business Related Credits
* * * * * * *
SEC. 38. GENERAL BUSINESS CREDIT.
(a) Allowance of Credit.--There shall be allowed as a credit
against the tax imposed by this chapter for the taxable year an
amount equal to the sum of--
(1) the business credit carryforwards carried to such
taxable year,
(2) the amount of the current year business credit,
plus
(3) the business credit carrybacks carried to such
taxable year.
(b) Current Year Business Credit.--For purposes of this
subpart, the amount of the current year business credit is the
sum of the following credits determined for the taxable year:
(1) the investment credit determined under section
46,
(2) the work opportunity credit determined under
section 51(a),
(3) the alcohol fuels credit determined under section
40(a),
(4) the research credit determined under section
41(a),
(5) the low-income housing credit determined under
section 42(a),
(6) the enhanced oil recovery credit under section
43(a),
(7) in the case of an eligible small business (as
defined in section 44(b)), the disabled access credit
determined under section 44(a),
(8) the renewable electricity production credit under
section 45(a),
(9) the empowerment zone employment credit determined
under section 1396(a),
(10) the Indian employment credit as determined under
section 45A(a),
(11) the employer social security credit determined
under section 45B(a),
(12) the orphan drug credit determined under section
45C(a),
(13) the new markets tax credit determined under
section 45D(a),
(14) in the case of an eligible employer (as defined
in section 45E(c)), the small employer pension plan
startup cost credit determined under section 45E(a),
(15) the employer-provided child care credit
determined under section 45F(a),
(16) the railroad track maintenance credit determined
under section 45G(a),
(17) the biodiesel fuels credit determined under
section 40A(a),
(18) the low sulfur diesel fuel production credit
determined under section 45H(a),
(19) the marginal oil and gas well production credit
determined under section 45I(a),
(20) the distilled spirits credit determined under
section 5011(a),
(21) the advanced nuclear power facility production
credit determined under section 45J(a),
(22) the nonconventional source production credit
determined under section 45K(a),
(23) the new energy efficient home credit determined
under section 45L(a),
(24) the energy efficient appliance credit determined
under section 45M(a),
(25) the portion of the alternative motor vehicle
credit to which section 30B(g)(1) applies,
(26) the portion of the alternative fuel vehicle
refueling property credit to which section 30C(d)(1)
applies,
(27) the Hurricane Katrina housing credit determined
under section 1400P(b),
(28) the Hurricane Katrina employee retention credit
determined under section 1400R(a),
(29) the Hurricane Rita employee retention credit
determined under section 1400R(b),
(30) the Hurricane Wilma employee retention credit
determined under section 1400R(c),
(31) the mine rescue team training credit determined
under section 45N(a),
(32) in the case of an eligible agricultural business
(as defined in section 45O(e)), the agricultural
chemicals security credit determined under section
45O(a),
(33) the differential wage payment credit determined
under section 45P(a),
(34) the carbon dioxide sequestration credit
determined under section 45Q(a)
(35) the portion of the new qualified plug-in
electric drive motor vehicle credit to which section
30D(c)(1) applies, plus
(36) the small employer health insurance credit
determined under section 45R.
(c) Limitation Based on Amount of Tax.--
(1) In general.--The credit allowed under subsection
(a) for any taxable year shall not exceed the excess
(if any) of the taxpayer's net income tax over the
greater of--
(A) the tentative minimum tax for the taxable
year, or
(B) 25 percent of so much of the taxpayer's
net regular tax liability as exceeds $25,000.
For purposes of the preceding sentence, the term ``net
income tax'' means the sum of the regular tax liability
and the tax imposed by section 55, reduced by the
credits allowable under subparts A and B of this part,
and the term ``net regular tax liability'' means the
regular tax liability reduced by the sum of the credits
allowable under subparts A and B of this part.
(2) Empowerment zone employment credit may offset 25
percent of minimum tax.--
(A) In general.--In the case of the
empowerment zone employment credit--
(i) this section and section 39 shall
be applied separately with respect to
such credit, and
(ii) for purposes of applying
paragraph (1) to such credit--
(I) 75 percent of the
tentative minimum tax shall be
substituted for the tentative
minimum tax under subparagraph
(A) thereof, and
(II) the limitation under
paragraph (1) (as modified by
subclause (I)) shall be reduced
by the credit allowed under
subsection (a) for the taxable
year (other than the
empowerment zone employment
credit, the New York Liberty
Zone business employee credit,
the eligible small business
credits, and the specified
credits).
(B) Empowerment zone employment credit.--For
purposes of this paragraph, the term
``empowerment zone employment credit'' means
the portion of the credit under subsection (a)
which is attributable to the credit determined
under section 1396 (relating to empowerment
zone employment credit).
(3) Special rules for new york liberty zone business
employee credit.--
(A) In general.--In the case of the New York
Liberty Zone business employee credit--
(i) this section and section 39 shall
be applied separately with respect to
such credit, and
(ii) in applying paragraph (1) to
such credit--
(I) the tentative minimum tax
shall be treated as being zero,
and
(II) the limitation under
paragraph (1) (as modified by
subclause (I)) shall be reduced
by the credit allowed under
subsection (a) for the taxable
year (other than the New York
Liberty Zone business employee
credit, the eligible small
business credits, and the
specified credits).
(B) new york liberty zone business employee
credit.--For purposes of this subsection, the
term ``New York Liberty Zone business employee
credit'' means the portion of work opportunity
credit under section 51 determined under
section 1400L(a).
(4) Special rules for specified credits.--
(A) In general.--In the case of specified
credits--
(i) this section and section 39 shall
be applied separately with respect to
such credits, and
(ii) in applying paragraph (1) to
such credits--
(I) the tentative minimum tax
shall be treated as being zero,
and
(II) the limitation under
paragraph (1) (as modified by
subclause (I)) shall be reduced
by the credit allowed under
subsection (a) for the taxable
year (other than the eligible
small business credits and the
specified credits).
(B) Specified credits.--For purposes of this
subsection, the term ``specified credits''
means--
(i) for taxable years beginning after
December 31, 2004, the credit
determined under section 40,
(ii) the credit determined under
section 41 for the taxable year with
respect to an eligible small business
(as defined in paragraph (5)(C), after
application of rules similar to the
rules of paragraph (5)(D)),
[(ii)] (iii) the credit determined
under section 42 to the extent
attributable to buildings placed in
service after December 31, 2007,
[(iii)] (iv) the credit determined
under section 45 to the extent that
such credit is attributable to
electricity or refined coal produced--
(I) at a facility which is
originally placed in service
after the date of the enactment
of this paragraph, and
(II) during the 4-year period
beginning on the date that such
facility was originally placed
in service,
[(iv)] (v) the credit determined
under section 45B,
[(v)] (vi) the credit determined
under section 45G,
[(vi)] (vii) the credit determined
under section 45R,
[(vii)] (viii) the credit determined
under section 46 to the extent that
such credit is attributable to the
energy credit determined under section
48,
[(viii)] (ix) the credit determined
under section 46 to the extent that
such credit is attributable to the
rehabilitation credit under section 47,
but only with respect to qualified
rehabilitation expenditures properly
taken into account for periods after
December 31, 2007, and
[(ix)] (x) the credit determined
under section 51.
(5) Special rules for eligible small business credits
in 2010.--
(A) In general.--In the case of eligible
small business credits determined in taxable
years beginning in 2010--
(i) this section and section 39 shall
be applied separately with respect to
such credits, and
(ii) in applying paragraph (1) to
such credits--
(I) the tentative minimum tax
shall be treated as being zero,
and
(II) the limitation under
paragraph (1) (as modified by
subclause (I)) shall be reduced
by the credit allowed under
subsection (a) for the taxable
year (other than the eligible
small business credits).
(B) Eligible small business credits.--For
purposes of this subsection, the term
``eligible small business credits'' means the
sum of the credits listed in subsection (b)
which are determined for the taxable year with
respect to an eligible small business. Such
credits shall not be taken into account under
paragraph (2), (3), or (4).
(C) Eligible small business.--For purposes of
this subsection, the term ``eligible small
business'' means, with respect to any taxable
year--
(i) a corporation the stock of which
is not publicly traded,
(ii) a partnership, or
(iii) a sole proprietorship, if the
average annual gross receipts of such
corporation, partnership, or sole
proprietorship for the 3-taxable-year
period preceding such taxable year does
not exceed $50,000,000. For purposes of
applying the test under the preceding
sentence, rules similar to the rules of
paragraphs (2) and (3) of section
448(c) shall apply.
(D) Treatment of partners and S corporation
shareholders.--Credits determined with respect
to a partnership or S corporation shall not be
treated as eligible small business credits by
any partner or shareholder unless such partner
or shareholder meets the gross receipts test
under subparagraph (C) for the taxable year in
which such credits are treated as current year
business credits.
(6) Special rules.--
(A) Married individuals.--In the case of a
husband or wife who files a separate return,
the amount specified under subparagraph (B) of
paragraph (1) shall be $12,500 in lieu of
$25,000. This subparagraph shall not apply if
the spouse of the taxpayer has no business
credit carryforward or carryback to, and has no
current year business credit for, the taxable
year of such spouse which ends within or with
the taxpayer's taxable year.
(B) Controlled groups.--In the case of a
controlled group, the $25,000 amount specified
under subparagraph (B) of paragraph (1) shall
be reduced for each component member of such
group by apportioning $25,000 among the
component members of such group in such manner
as the Secretary shall by regulations
prescribe. For purposes of the preceding
sentence, the term ``controlled group'' has the
meaning given to such term by section 1563(a).
(C) Limitations with respect to certain
persons.--In the case of a person described in
subparagraph (A) or (B) of section 46(e)(1) (as
in effect on the day before the date of the
enactment of the Revenue Reconciliation Act of
1990), the $25,000 amount specified under
subparagraph (B) of paragraph (1) shall equal
such person's ratable share (as determined
under section 46(e)(2) (as so in effect) of
such amount.
(D) Estates and trusts.--In the case of an
estate or trust, the $25,000 amount specified
under subparagraph (B) of paragraph (1) shall
be reduced to an amount which bears the same
ratio to $25,000 as the portion of the income
of the estate or trust which is not allocated
to beneficiaries bears to the total income of
the estate or trust.
(d) Ordering Rules.--For purposes of any provision of this
title where it is necessary to ascertain the extent to which
the credits determined under any section referred to in
subsection (b) are used in a taxable year or as a carryback or
carryforward--
(1) In general.--The order in which such credits are
used shall be determined on the basis of the order in
which they are listed in subsection (b) as of the close
of the taxable year in which the credit is used.
(2) Components of investment credit.--The order in
which the credits listed in section 46 are used shall
be determined on the basis of the order in which such
credits are listed in section 46 as of the close of the
taxable year in which the credit is used.
* * * * * * *
SEC. 41. CREDIT FOR INCREASING RESEARCH ACTIVITIES.
[(a) General Rule.--For purposes of section 38, the research
credit determined under this section for the taxable year shall
be an amount equal to the sum of--
[(1) 20 percent of the excess (if any) of--
[(A) the qualified research expenses for the
taxable year, over
[(B) the base amount,
[(2) 20 percent of the basic research payments
determined under subsection (e)(1)(A), and
[(3) 20 percent of the amounts paid or incurred by
the taxpayer in carrying on any trade or business of
the taxpayer during the taxable year (including as
contributions) to an energy research consortium for
energy research.]
(a) In General.--For purposes of section 38, the research
credit determined under this section for the taxable year shall
be an amount equal to the sum of--
(1) 20 percent of so much of the qualified research
expenses for the taxable year as exceeds 50 percent of
the average qualified research expenses for the 3
taxable years preceding the taxable year for which the
credit is being determined,
(2) 20 percent of so much of the basic research
payments for the taxable year as exceeds 50 percent of
the average basic research payments for the 3 taxable
years preceding the taxable year for which the credit
is being determined, plus
(3) 20 percent of the amounts paid or incurred by the
taxpayer in carrying on any trade or business of the
taxpayer during the taxable year (including as
contributions) to an energy research consortium for
energy research.
(b) Qualified Research Expenses.--For purposes of this
section--
(1) Qualified research expenses.--The term
``qualified research expenses'' means the sum of the
following amounts which are paid or incurred by the
taxpayer during the taxable year in carrying on any
trade or business of the taxpayer--
(A) in-house research expenses, and
(B) contract research expenses.
(2) In-house research expenses.--
(A) In general.--The term ``in-house research
expenses'' means--
(i) any wages paid or incurred to an
employee for qualified services
performed by such employee,
(ii) any amount paid or incurred for
supplies used in the conduct of
qualified research, and
(iii) under regulations prescribed by
the Secretary, any amount paid or
incurred to another person for the
right to use computers in the conduct
of qualified research.
Clause (iii) shall not apply to any amount to
the extent that the taxpayer (or any person
with whom the taxpayer must aggregate
expenditures under subsection (f)(1)) receives
or accrues any amount from any other person for
the right to use substantially identical
personal property.
(B) Qualified services.--The term ``qualified
services'' means services consisting of--
(i) engaging in qualified research,
or
(ii) engaging in the direct
supervision or direct support of
research activities which constitute
qualified research.
If substantially all of the services performed
by an individual for the taxpayer during the
taxable year consists of services meeting the
requirements of clause (i) or (ii), the term
``qualified services'' means all of the
services performed by such individual for the
taxpayer during the taxable year.
(C) Supplies.--The term ``supplies'' means
any tangible property other than--
(i) land or improvements to land, and
(ii) property of a character subject
to the allowance for depreciation.
(D) Wages.--
(i) In general.--The term ``wages''
has the meaning given such term by
section 3401(a).
(ii) Self-employed individuals and
owner-employees.--In the case of an
employee (within the meaning of section
401(c)(1)), the term ``wages'' includes
the earned income (as defined in
section 401(c)(2)) of such employee.
(iii) Exclusion for wages to which
work opportunity credit applies.--The
term ``wages'' shall not include any
amount taken into account in
determining the work opportunity credit
under section 51(a).
(3) Contract research expenses.--
(A) In general.--The term ``contract research
expenses'' means 65 percent of any amount paid
or incurred by the taxpayer to any person
(other than an employee of the taxpayer) for
qualified research.
(B) Prepaid amounts.--If any contract
research expenses paid or incurred during any
taxable year are attributable to qualified
research to be conducted after the close of
such taxable year, such amount shall be treated
as paid or incurred during the period during
which the qualified research is conducted.
(C) Amounts paid to certain research
consortia.--
(i) In general.--Subparagraph (A)
shall be applied by substituting ``75
percent'' for ``65 percent'' with
respect to amounts paid or incurred by
the taxpayer to a qualified research
consortium for qualified research on
behalf of the taxpayer and 1 or more
unrelated taxpayers. For purposes of
the preceding sentence, all persons
treated as a single employer under
subsection (a) or (b) of section 52
shall be treated as related taxpayers.
(ii) Qualified research consortium.--
The term ``qualified research
consortium'' means any organization
which--
(I) is described in section
501(c)(3) or 501(c)(6) and is
exempt from tax under section
501(a),
(II) is organized and
operated primarily to conduct
scientific research, and
(III) is not a private
foundation.
(D) Amounts paid to eligible small
businesses, universities, and Federal
laboratories.--
(i) In general.--In the case of
amounts paid by the taxpayer to--
(I) an eligible small
business,
(II) an institution of higher
education (as defined in
section 3304(f)), or
(III) an organization which
is a Federal laboratory,
for qualified research which is energy
research, subparagraph (A) shall be
applied by substituting ``100 percent''
for ``65 percent''.
(ii) Eligible small business.--For
purposes of this subparagraph, the term
``eligible small business'' means a
small business with respect to which
the taxpayer does not own (within the
meaning of section 318) 50 percent or
more of--
(I) in the case of a
corporation, the outstanding
stock of the corporation
(either by vote or value), and
(II) in the case of a small
business which is not a
corporation, the capital and
profits interests of the small
business.
(iii) Small business.--For purposes
of this subparagraph--
(I) In general.--The term
``small business'' means, with
respect to any calendar year,
any person if the annual
average number of employees
employed by such person during
either of the 2 preceding
calendar years was 500 or
fewer. For purposes of the
preceding sentence, a preceding
calendar year may be taken into
account only if the person was
in existence throughout the
year.
(II) Startups, controlled
groups, and predecessors.--
Rules similar to the rules of
subparagraphs (B) and (D) of
section 220(c)(4) shall apply
for purposes of this clause.
(iv) Federal laboratory.--For
purposes of this subparagraph, the term
``Federal laboratory'' has the meaning
given such term by section 4(6) of the
Stevenson-Wydler Technology Innovation
Act of 1980 (15 U.S.C. 3703(6)), as in
effect on the date of the enactment of
the Energy Tax Incentives Act of 2005.
(4) Trade or business requirement disregarded for in-
house research expenses of certain startup ventures.--
In the case of in-house research expenses, a taxpayer
shall be treated as meeting the trade or business
requirement of paragraph (1) if, at the time such in-
house research expenses are paid or incurred, the
principal purpose of the taxpayer in making such
expenditures is to use the results of the research in
the active conduct of a future trade or business--
(A) of the taxpayer, or
(B) of 1 or more other persons who with the
taxpayer are treated as a single taxpayer under
subsection (f)(1).
[(c) Base Amount.--
[(1) In general.--The term ``base amount'' means the
product of--
[(A) the fixed-base percentage, and
[(B) the average annual gross receipts of the
taxpayer for the 4 taxable years preceding the
taxable year for which the credit is being
determined (hereinafter in this subsection
referred to as the ``credit year'').
[(2) Minimum base amount.--In no event shall the base
amount be less than 50 percent of the qualified
research expenses for the credit year.
[(3) Fixed-base percentage.--
[(A) In general.--Except as otherwise
provided in this paragraph, the fixed-base
percentage is the percentage which the
aggregate qualified research expenses of the
taxpayer for taxable years beginning after
December 31, 1983, and before January 1, 1989,
is of the aggregate gross receipts of the
taxpayer for such taxable years.
[(B) Start-up companies.--
[(i) Taxpayers to which subparagraph
applies.--The fixed-base percentage
shall be determined under this
subparagraph if--
[(I) the first taxable year
in which a taxpayer had both
gross receipts and qualified
research expenses begins after
December 31, 1983, or
[(II) there are fewer than 3
taxable years beginning after
December 31, 1983, and before
January 1, 1989, in which the
taxpayer had both gross
receipts and qualified research
expenses.
[(ii) Fixed-base percentage.--In a
case to which this subparagraph
applies, the fixed-base percentage is--
[(I) 3 percent for each of
the taxpayer's 1st 5 taxable
years beginning after December
31, 1993, for which the
taxpayer has qualified research
expenses,
[(II) in the case of the
taxpayer's 6th such taxable
year, 1/6 of the percentage
which the aggregate qualified
research expenses of the
taxpayer for the 4th and 5th
such taxable years is of the
aggregate gross receipts of the
taxpayer for such years,
[(III) in the case of the
taxpayer's 7th such taxable
year, 1/3 of the percentage
which the aggregate qualified
research expenses of the
taxpayer for the 5th and 6th
such taxable years is of the
aggregate gross receipts of the
taxpayer for such years,
[(IV) in the case of the
taxpayer's 8th such taxable
year, 1/2 of the percentage
which the aggregate qualified
research expenses of the
taxpayer for the 5th, 6th, and
7th such taxable years is of
the aggregate gross receipts of
the taxpayer for such years,
[(V) in the case of the
taxpayer's 9th such taxable
year, 2/3 of the percentage
which the aggregate qualified
research expenses of the
taxpayer for the 5th, 6th, 7th,
and 8th such taxable years is
of the aggregate gross receipts
of the taxpayer for such years,
[(VI) in the case of the
taxpayer's 10th such taxable
year, 5/6 of the percentage
which the aggregate qualified
research expenses of the
taxpayer for the 5th, 6th, 7th,
8th, and 9th such taxable years
is of the aggregate gross
receipts of the taxpayer for
such years, and
[(VII) for taxable years
thereafter, the percentage
which the aggregate qualified
research expenses for any 5
taxable years selected by the
taxpayer from among the 5th
through the 10th such taxable
years is of the aggregate gross
receipts of the taxpayer for
such selected years.
[(iii) Treatment of de minimis
amounts of gross receipts and qualified
research expenses.--The Secretary may
prescribe regulations providing that de
minimis amounts of gross receipts and
qualified research expenses shall be
disregarded under clauses (i) and (ii).
[(C) Maximum fixed-base percentage.--In no
event shall the fixed-base percentage exceed 16
percent.
[(D) Rounding.--The percentages determined
under subparagraphs (A) and (B)(ii) shall be
rounded to the nearest 1/100th of 1 percent.
[(4) Election of alternative incremental credit.--
[(A) In general.--At the election of the
taxpayer, the credit determined under
subsection (a)(1) shall be equal to the sum
of--
[(i) 3 percent of so much of the
qualified research expenses for the
taxable year as exceeds 1 percent of
the average described in subsection
(c)(1)(B) but does not exceed 1.5
percent of such average,
[(ii) 4 percent of so much of such
expenses as exceeds 1.5 percent of such
average but does not exceed 2 percent
of such average, and
[(iii) 5 percent of so much of such
expenses as exceeds 2 percent of such
average.
[(B) Election.--An election under this
paragraph shall apply to the taxable year for
which made and all succeeding taxable years
unless revoked with the consent of the
Secretary.
[(5) Election of alternative simplified credit.--
[(A) In general.--At the election of the
taxpayer, the credit determined under
subsection (a)(1) shall be equal to 14 percent
(12 percent in the case of taxable years ending
before January 1, 2009) of so much of the
qualified research expenses for the taxable
year as exceeds 50 percent of the average
qualified research expenses for the 3 taxable
years preceding the taxable year for which the
credit is being determined.
[(B) Special rule in case of no qualified
research expenses in any of 3 preceding taxable
years.--
[(i) Taxpayers to which subparagraph
applies.--The credit under this
paragraph shall be determined under
this subparagraph if the taxpayer has
no qualified research expenses in any
one of the 3 taxable years preceding
the taxable year for which the credit
is being determined.
[(ii) Credit rate.--The credit
determined under this subparagraph
shall be equal to 6 percent of the
qualified research expenses for the
taxable year.
[(C) Election.--An election under this
paragraph shall apply to the taxable year for
which made and all succeeding taxable years
unless revoked with the consent of the
Secretary. An election under this paragraph may
not be made for any taxable year to which an
election under paragraph (4) applies.
[(6) Consistent treatment of expenses required.--
[(A) In general.--Notwithstanding whether the
period for filing a claim for credit or refund
has expired for any taxable year taken into
account in determining the fixed-base
percentage, the qualified research expenses
taken into account in computing such percentage
shall be determined on a basis consistent with
the determination of qualified research
expenses for the credit year.
[(B) Prevention of distortions.--The
Secretary may prescribe regulations to prevent
distortions in calculating a taxpayer's
qualified research expenses or gross receipts
caused by a change in accounting methods used
by such taxpayer between the current year and a
year taken into account in computing such
taxpayer's fixed-base percentage.
[(7) Gross receipts.--For purposes of this
subsection, gross receipts for any taxable year shall
be reduced by returns and allowances made during the
taxable year. In the case of a foreign corporation,
there shall be taken into account only gross receipts
which are effectively connected with the conduct of a
trade or business within the United States, the
Commonwealth of Puerto Rico, or any possession of the
United States.]
(c) Determination of Average Research Expenses for Prior
Years.--
(1) Special rule in case of no qualified research
expenditures in any of 3 preceding taxable years.--In
any case in which the taxpayer has no qualified
research expenses in any one of the 3 taxable years
preceding the taxable year for which the credit is
being determined, the amount determined under
subsection (a)(1) for such taxable year shall be equal
to 10 percent of the qualified research expenses for
the taxable year.
(2) Consistent treatment of expenses.--
(A) In general.--Notwithstanding whether the
period for filing a claim for credit or refund
has expired for any taxable year taken into
account in determining the average qualified
research expenses, or average basic research
payments, taken into account under subsection
(a), the qualified research expenses and basic
research payments taken into account in
determining such averages shall be determined
on a basis consistent with the determination of
qualified research expenses and basic research
payments, respectively, for the credit year.
(B) Prevention of distortions.--The Secretary
may prescribe regulations to prevent
distortions in calculating a taxpayer's
qualified research expenses or basic research
payments caused by a change in accounting
methods used by such taxpayer between the
current year and a year taken into account in
determining the average qualified research
expenses or average basic research payments
taken into account under subsection (a).
(d) Qualified Research Defined.--For purposes of this
section--
(1) In general.--The term ``qualified research''
means research--
(A) with respect to which expenditures may be
treated as expenses under section 174,
(B) which is undertaken for the purpose of
discovering information--
(i) which is technological in nature,
and
(ii) the application of which is
intended to be useful in the
development of a new or improved
business component of the taxpayer, and
(C) substantially all of the activities of
which constitute elements of a process of
experimentation for a purpose described in
paragraph (3).
Such term does not include any activity described in
paragraph (4).
(2) Tests to be applied separately to each business
component.--For purposes of this subsection--
(A) In general.--Paragraph (1) shall be
applied separately with respect to each
business component of the taxpayer.
(B) Business component defined.--The term
``business component'' means any product,
process, computer software, technique, formula,
or invention which is to be--
(i) held for sale, lease, or license,
or
(ii) used by the taxpayer in a trade
or business of the taxpayer.
(C) Special rule for production processes.--
Any plant process, machinery, or technique for
commercial production of a business component
shall be treated as a separate business
component (and not as part of the business
component being produced).
(3) Purposes for which research may qualify for
credit.--For purposes of paragraph (1)(C)--
(A) In general.--Research shall be treated as
conducted for a purpose described in this
paragraph if it relates to--
(i) a new or improved function,
(ii) performance, or
(iii) reliability or quality.
(B) Certain purposes not qualified.--Research
shall in no event be treated as conducted for a
purpose described in this paragraph if it
relates to style, taste, cosmetic, or seasonal
design factors.
(4) Activities for which credit not allowed.--The
term ``qualified research'' shall not include any of
the following:
(A) Research after commercial production.--
Any research conducted after the beginning of
commercial production of the business
component.
(B) Adaptation of existing business
components.--Any research related to the
adaptation of an existing business component to
a particular customer's requirement or need.
(C) Duplication of existing business
component.--Any research related to the
reproduction of an existing business component
(in whole or in part) from a physical
examination of the business component itself or
from plans, blueprints, detailed
specifications, or publicly available
information with respect to such business
component.
(D) Surveys, studies, etc..--Any--
(i) efficiency survey,
(ii) activity relating to management
function or technique,
(iii) market research, testing, or
development (including advertising or
promotions),
(iv) routine data collection, or
(v) routine or ordinary testing or
inspection for quality control.
(E) Computer software.--Except to the extent
provided in regulations, any research with
respect to computer software which is developed
by (or for the benefit of) the taxpayer
primarily for internal use by the taxpayer,
other than for use in--
(i) an activity which constitutes
qualified research (determined with
regard to this subparagraph), or
(ii) a production process with
respect to which the requirements of
paragraph (1) are met.
(F) Foreign research.--Any research conducted
outside the United States, the Commonwealth of
Puerto Rico, or any possession of the United
States.
(G) Social sciences, etc..--Any research in
the social sciences, arts, or humanities.
(H) Funded research.--Any research to the
extent funded by any grant, contract, or
otherwise by another person (or governmental
entity).
[(e) Credit Allowable With Respect to Certain Payments to
Qualified Organizations for Basic Research.--For purposes of
this section--
[(1) In general.--In the case of any taxpayer who
makes basic research payments for any taxable year--
[(A) the amount of basic research payments
taken into account under subsection (a)(2)
shall be equal to the excess of--
[(i) such basic research payments,
over
[(ii) the qualified organization base
period amount, and
[(B) that portion of such basic research
payments which does not exceed the qualified
organization base period amount shall be
treated as contract research expenses for
purposes of subsection (a)(1).
[(2) Basic research payments defined.--For purposes
of this subsection--
[(A) In general.--The term ``basic research
payment'' means, with respect to any taxable
year, any amount paid in cash during such
taxable year by a corporation to any qualified
organization for basic research but only if--
[(i) such payment is pursuant to a
written agreement between such
corporation and such qualified
organization, and
[(ii) such basic research is to be
performed by such qualified
organization.
[(B) Exception to requirement that research
be performed by the organization.--In the case
of a qualified organization described in
subparagraph (C) or (D) of paragraph (6),
clause (ii) of subparagraph (A) shall not
apply.
[(3) Qualified organization base period amount.--For
purposes of this subsection, the term ``qualified
organization base period amount'' means an amount equal
to the sum of--
[(A) the minimum basic research amount, plus
[(B) the maintenance-of-effort amount.
[(4) Minimum basic research amount.--For purposes of
this subsection--
[(A) In general.--The term ``minimum basic
research amount'' means an amount equal to the
greater of--
[(i) 1 percent of the average of the
sum of amounts paid or incurred during
the base period for--
[(I) any in-house research
expenses, and
[(II) any contract research
expenses, or
[(ii) the amounts treated as contract
research expenses during the base
period by reason of this subsection (as
in effect during the base period).
[(B) Floor amount.--Except in the case of a
taxpayer which was in existence during a
taxable year (other than a short taxable year)
in the base period, the minimum basic research
amount for any base period shall not be less
than 50 percent of the basic research payments
for the taxable year for which a determination
is being made under this subsection.
[(5) Maintenance-of-effort amount.--For purposes of
this subsection--
[(A) In general.--The term ``maintenance-of-
effort amount'' means, with respect to any
taxable year, an amount equal to the excess (if
any) of--
[(i) an amount equal to--
[(I) the average of the
nondesignated university
contributions paid by the
taxpayer during the base
period, multiplied by
[(II) the cost-of-living
adjustment for the calendar
year in which such taxable year
begins, over (ii) the amount of
nondesignated university
contributions paid by the
taxpayer during such taxable
year.
[(B) Nondesignated university
contributions.--For purposes of this paragraph,
the term ``nondesignated university
contribution'' means any amount paid by a
taxpayer to any qualified organization
described in paragraph (6)(A)--
[(i) for which a deduction was
allowable under section 170, and
[(ii) which was not taken into
account--
[(I) in computing the amount
of the credit under this
section (as in effect during
the base period) during any
taxable year in the base
period, or
[(II) as a basic research
payment for purposes of this
section.
[(C) Cost-of-living adjustment defined.--
[(i) In general.--The cost-of-living
adjustment for any calendar year is the
cost-of-living adjustment for such
calendar year determined under section
1(f)(3), by substituting ``calendar
year 1987'' for ``calendar year 1992''
in subparagraph (B) thereof.
[(ii) Special rule where base period
ends in a calendar year other than 1983
or 1984.--If the base period of any
taxpayer does not end in 1983 or 1984,
section 1(f)(3)(B) shall, or purposes
of this paragraph, be applied by
substituting the calendar year in which
such base period ends for 1992. Such
substitution shall be in lieu of the
substitution under clause (i).]
(e) Basic Research Payments.-- For purposes of this section--
(1) In general.--The term ``basic research payment''
means, with respect to any taxable year, any amount
paid in cash during such taxable year by a corporation
to any qualified organization for basic research but
only if--
(A) such payment is pursuant to a written
agreement between such corporation and such
qualified organization, and
(B) such basic research is to be performed by
such qualified organization.
(2) Exception to requirement that research be
performed by the organization.--In the case of a
qualified organization described in subparagraph (C) or
(D) of paragraph (3), subparagraph (B) of paragraph (1)
shall not apply.
[(6)] (3) Qualified organization.--For purposes of
this subsection, the term ``qualified organization''
means any of the following organizations:
(A) Educational institutions.--Any
educational organization which--
(i) is an institution of higher
education (within the meaning of
section 3304(f)), and
(ii) is described in section
170(b)(1)(A)(ii).
(B) Certain scientific research
organizations.--Any organization not described
in subparagraph (A) which--
(i) is described in section 501(c)(3)
and is exempt from tax under section
501(a),
(ii) is organized and operated
primarily to conduct scientific
research, and
(iii) is not a private foundation.
(C) Scientific tax-exempt organizations.--Any
organization which--
(i) is described in--
(I) section 501(c)(3) (other
than a private foundation), or
(II) section 501(c)(6),
(ii) is exempt from tax under section
501(a),
(iii) is organized and operated
primarily to promote scientific
research by qualified organizations
described in subparagraph (A) pursuant
to written research agreements, and
(iv) currently expends--
(I) substantially all of its
funds, or
(II) substantially all of the
basic research payments
received by it,
for grants to, or contracts for basic
research with, an organization
described in subparagraph (A).
(D) Certain grant organizations.--Any
organization not described in subparagraph (B)
or (C) which--
(i) is described in section 501(c)(3)
and is exempt from tax under section
501(a) (other than a private
foundation),
(ii) is established and maintained by
an organization established before July
10, 1981, which meets the requirements
of clause (i),
(iii) is organized and operated
exclusively for the purpose of making
grants to organizations described in
subparagraph (A) pursuant to written
research agreements for purposes of
basic research, and
(iv) makes an election, revocable
only with the consent of the Secretary,
to be treated as a private foundation
for purposes of this title (other than
section 4940, relating to excise tax
based on investment income).
[(7)] (4) Definitions and special rules.--For
purposes of this subsection--
(A) Basic research.--The term ``basic
research'' means any original investigation for
the advancement of scientific knowledge not
having a specific commercial objective, except
that such term shall not include--
(i) basic research conducted outside
of the United States, and
(ii) basic research in the social
sciences, arts, or humanities.
[(B) Base period.--The term ``base period''
means the 3-taxable-year period ending with the
taxable year immediately preceding the 1st
taxable year of the taxpayer beginning after
December 31, 1983.
[(C) Exclusion from incremental credit
calculation.--For purposes of determining the
amount of credit allowable under subsection
(a)(1) for any taxable year, the amount of the
basic research payments taken into account
under subsection (a)(2)--
[(i) shall not be treated as
qualified research expenses under
subsection (a)(1)(A), and
[(ii) shall not be included in the
computation of base amount under
subsection (a)(1)(B).]
[(D)] (B) Trade or business qualification.--
For purposes of applying subsection (b)(1) to
this subsection, any basic research payments
shall be treated as an amount paid in carrying
on a trade or business of the taxpayer in the
taxable year in which it is paid (without
regard to the provisions of subsection
(b)(3)(B)).
[(E)] (C) Certain corporations not
eligible.--The term ``corporation'' shall not
include--
(i) an S corporation,
(ii) a personal holding company (as
defined in section 542), or
(iii) a service organization (as
defined in section 414(m)(3)).
(f) Special Rules.--For purposes of this section--
(1) Aggregation of expenditures.--
(A) Controlled group of corporations.--In
determining the amount of the credit under this
section--
(i) all members of the same
controlled group of corporations shall
be treated as a single taxpayer, and
(ii) the credit (if any) allowable by
this section to each such member shall
be determined on a proportionate basis
to its share of the aggregate of the
qualified research expenses, basic
research payments, and amounts paid or
incurred to energy research
consortiums, taken into account by such
controlled group for purposes of this
section.
(B) Common control.--Under regulations
prescribed by the Secretary, in determining the
amount of the credit under this section--
(i) all trades or businesses (whether
or not incorporated) which are under
common control shall be treated as a
single taxpayer, and
(ii) the credit (if any) allowable by
this section to each such person shall
be determined on a proportionate basis
to its share of the aggregate of the
qualified research expenses, basic
research payments, and amounts paid or
incurred to energy research
consortiums, taken into account by all
such persons under common control for
purposes of this section.
The regulations prescribed under this
subparagraph shall be based on principles
similar to the principles which apply in the
case of subparagraph (A).
(2) Allocations.--
(A) Pass-thru in the case of estates and
trusts.--Under regulations prescribed by the
Secretary, rules similar to the rules of
subsection (d) of section 52 shall apply.
(B) Allocation in the case of partnerships.--
In the case of partnerships, the credit shall
be allocated among partners under regulations
prescribed by the Secretary.
(3) Adjustments for certain acquisitions, etc..--
Under regulations prescribed by the Secretary--
(A) Acquisitions.--
(i) In general.--If a person acquires
the major portion of either a trade or
business or a separate unit of a trade
or business (hereinafter in this
paragraph referred to as the ``acquired
business'') of another person
(hereinafter in this paragraph referred
to as the ``predecessor''), then the
amount of qualified research expenses
paid or incurred by the acquiring
person during the measurement period
shall be increased by the amount
determined under clause (ii)[, and the
gross receipts of the acquiring person
for such period shall be increased by
the amount determined under clause
(iii)].
(ii) Amount determined with respect
to qualified research expenses.--The
amount determined under this clause
is--
(I) for purposes of applying
this section for the taxable
year in which such acquisition
is made, the acquisition year
amount, and
(II) for purposes of applying
this section for any taxable
year after the taxable year in
which such acquisition is made,
the qualified research expenses
paid or incurred by the
predecessor with respect to the
acquired business during the
measurement period.
[(iii) Amount determined with respect
to gross receipts.--The amount
determined under this clause is the
amount which would be determined under
clause (ii) if ``the gross receipts
of'' were substituted for ``the
qualified research expenses paid or
incurred by'' each place it appears in
clauses (ii) and (iv).]
[(iv)] (iii) Acquisition year
amount.--For purposes of clause (ii),
the acquisition year amount is the
amount equal to the product of--
(I) the qualified research
expenses paid or incurred by
the predecessor with respect to
the acquired business during
the measurement period, and
(II) the number of days in
the period beginning on the
date of the acquisition and
ending on the last day of the
taxable year in which the
acquisition is made,
divided by the number of days in the
acquiring person's taxable year.
[(v)] (iv) Special rules for
coordinating taxable years.--In the
case of an acquiring person and a
predecessor whose taxable years do not
begin on the same date--
(I) each reference to a
taxable year in clauses (ii)
[and (iv)] and (iii) shall
refer to the appropriate
taxable year of the acquiring
person,
(II) the qualified research
expenses paid or incurred by
the predecessor[, and the gross
receipts of the predecessor,]
during each taxable year of the
predecessor any portion of
which is part of the
measurement period shall be
allocated equally among the
days of such taxable year, and
(III) the amount of such
qualified research expenses
taken into account under
clauses (ii) [and (iv)] and
(iii) with respect to a taxable
year of the acquiring person
shall be equal to the total of
the expenses attributable under
subclause (II) to the days
occurring during such taxable
year[, and].
[(IV) the amount of such
gross receipts taken into
account under clause (iii) with
respect to a taxable year of
the acquiring person shall be
equal to the total of the gross
receipts attributable under
subclause (II) to the days
occurring during such taxable
year.]
[(vi)] (v) Measurement period.--For
purposes of this subparagraph, the term
``measurement period'' means, with
respect to the taxable year of the
acquiring person for which the credit
is determined, any period of the
acquiring person preceding such taxable
year which is taken into account for
purposes of determining the credit for
such year.
(B) Dispositions.--If the predecessor
furnished to the acquiring person such
information as is necessary for the application
of subparagraph (A), then, for purposes of
applying this section for any taxable year
ending after such disposition, the amount of
qualified research expenses paid or incurred
by[, and the gross receipts of,] the
predecessor during the measurement period (as
defined in subparagraph [(A)(vi)] (A)(v),
determined by substituting ``predecessor'' for
``acquiring person'' each place it appears)
shall be reduced by--
(i) in the case of the taxable year
in which such disposition is made, an
amount equal to the product of--
(I) the qualified research
expenses paid or incurred by[,
or gross receipts of,] the
predecessor with respect to the
acquired business during the
measurement period (as so
defined and so determined), and
(II) the number of days in
the period beginning on the
date of acquisition (as
determined for purposes of
subparagraph [(A)(iv)(II)]
(A)(iii)(II)) and ending on the
last day of the taxable year of
the predecessor in which the
disposition is made,
divided by the number of days in the
taxable year of the predecessor, and
(ii) in the case of any taxable year
ending after the taxable year in which
such disposition is made, the amount
described in clause (i)(I).
[(C) Certain reimbursements taken into
account in determining fixed-base percentage.--
If during any of the 3 taxable years following
the taxable year in which a disposition to
which subparagraph (B) applies occurs, the
disposing taxpayer (or a person with whom the
taxpayer is required to aggregate expenditures
under paragraph (1)) reimburses the acquiring
person (or a person required to so aggregate
expenditures with such person) for research on
behalf of the taxpayer, then the amount of
qualified research expenses of the taxpayer for
the taxable years taken into account in
computing the fixed-base percentage shall be
increased by the lesser of--
[(i) the amount of the decrease under
subparagraph (B) which is allocable to
taxable years so taken into account, or
[(ii) the product of the number of
taxable years so taken into account,
multiplied by the amount of the
reimbursement described in this
subparagraph.]
(C) Adjustments for basic research
payments.--In the case of basic research
payments, rules similar to the rules of
subparagraph (A) and (B) shall apply.
(4) Short taxable years.--In the case of any short
taxable year, qualified research expenses [and gross
receipts] and basic research payments shall be
annualized in such circumstances and under such methods
as the Secretary may prescribe by regulation.
(5) Controlled group of corporations.--The term
``controlled group of corporations'' has the same
meaning given to such term by section 1563(a), except
that--
(A) ``more than 50 percent'' shall be
substituted for ``at least 80 percent'' each
place it appears in section 1563(a)(1), and
(B) the determination shall be made without
regard to subsections (a)(4) and (e)(3)(C) of
section 1563.
(6) Energy research consortium.--
(A) In general.--The term ``energy research
consortium'' means any organization--
(i) which is--
(I) described in section
501(c)(3) and is exempt from
tax under section 501(a) and is
organized and operated
primarily to conduct energy
research, or
(II) organized and operated
primarily to conduct energy
research in the public interest
(within the meaning of section
501(c)(3)),
(ii) which is not a private
foundation,
(iii) to which at least 5 unrelated
persons paid or incurred during the
calendar year in which the taxable year
of the organization begins amounts
(including as contributions) to such
organization for energy research, and
(iv) to which no single person paid
or incurred (including as
contributions) during such calendar
year an amount equal to more than 50
percent of the total amounts received
by such organization during such
calendar year for energy research.
(B) Treatment of persons.--All persons
treated as a single employer under subsection
(a) or (b) of section 52 shall be treated as
related persons for purposes of subparagraph
(A)(iii) and as a single person for purposes of
subparagraph (A)(iv).
(C) Foreign research.--For purposes of
subsection (a)(3), amounts paid or incurred for
any energy research conducted outside the
United States, the Commonwealth of Puerto Rico,
or any possession of the United States shall
not be taken into account.
(D) Denial of double benefit.--Any amount
taken into account under subsection (a)(3)
shall not be taken into account under paragraph
(1) or (2) of subsection (a).
(E) Energy research.--The term ``energy
research'' does not include any research which
is not qualified research.
(g) Special Rule for Pass-Thru of Credit.--In the case of an
individual who--
(1) owns an interest in an unincorporated trade or
business,
(2) is a partner in a partnership,
(3) is a beneficiary of an estate or trust, or
(4) is a shareholder in an S corporation,
the amount determined under subsection (a) for any taxable year
shall not exceed an amount (separately computed with respect to
such person's interest in such trade or business or entity)
equal to the amount of tax attributable to that portion of a
person's taxable income which is allocable or apportionable to
the person's interest in such trade or business or entity. If
the amount determined under subsection (a) for any taxable year
exceeds the limitation of the preceding sentence, such amount
may be carried to other taxable years under the rules of
section 39; except that the limitation of the preceding
sentence shall be taken into account in lieu of the limitation
of section 38(c) in applying section 39.
[(h) Termination.--
[(1) In general.--This section shall not apply to any
amount paid or incurred after December 31, 2014.
[(2) Termination of alternative incremental credit.--
No election under subsection (c)(4) shall apply to
taxable years beginning after December 31, 2008.
[(2) Computation for taxable year in which credit
terminates.--In the case of any taxable year with
respect to which this section applies to a number of
days which is less than the total number of days in
such taxable year--
[(A) the amount determined under subsection
(c)(1)(B) with respect to such taxable year
shall be the amount which bears the same ratio
to such amount (determined without regard to
this paragraph) as the number of days in such
taxable year to which this section applies
bears to the total number of days in such
taxable year, and
[(B) for purposes of subsection (c)(5), the
average qualified research expenses for the
preceding 3 taxable years shall be the amount
which bears the same ratio to such average
qualified research expenses (determined without
regard to this paragraph) as the number of days
in such taxable year to which this section
applies bears to the total number of days in
such taxable year.]
* * * * * * *
SEC. 45C. CLINICAL TESTING EXPENSES FOR CERTAIN DRUGS FOR RARE DISEASES
OR CONDITIONS.
(a) General Rule.--For purposes of section 38, the credit
determined under this section for the taxable year is an amount
equal to 50 percent of the qualified clinical testing expenses
for the taxable year.
(b) Qualified Clinical Testing Expenses.--For purposes of
this section--
(1) Qualified clinical testing expenses.--
(A) In general.--Except as otherwise provided
in this paragraph, the term ``qualified
clinical testing expenses'' means the amounts
which are paid or incurred by the taxpayer
during the taxable year which would be
described in subsection (b) of section 41 if
such subsection were applied with the
modifications set forth in subparagraph (B).
(B) Modifications.--For purposes of
subparagraph (A), subsection (b) of section 41
shall be applied--
(i) by substituting ``clinical
testing'' for ``qualified research''
each place it appears in paragraphs (2)
and (3) of such subsection, and
(ii) by substituting ``100 percent''
for ``65 percent'' in paragraph (3)(A)
of such subsection.
(C) Exclusion for amounts funded by grants,
etc.--The term ``qualified clinical testing
expenses'' shall not include any amount to the
extent such amount is funded by any grant,
contract, or otherwise by another person (or
any governmental entity).
[(D) Special rule.--If section 41 is not in
effect for any period, such section shall be
deemed to remain in effect for such period for
purposes of this paragraph.]
(2) Clinical testing.--
(A) In general.--The term ``clinical
testing'' means any human clinical testing--
(i) which is carried out under an
exemption for a drug being tested for a
rare disease or condition under section
505(i) of the Federal Food, Drug, and
Cosmetic Act (or regulations issued
under such section),
(ii) which occurs--
(I) after the date such drug
is designated under section 526
of such Act, and
(II) before the date on which
an application with respect to
such drug is approved under
section 505(b) of such Act or,
if the drug is a biological
product, before the date on
which a license for such drug
is issued under section 351 of
the Public Health Service Act;
and
(iii) which is conducted by or on
behalf of the taxpayer to whom the
designation under such section 526
applies.
(B) Testing must be related to use for rare
disease or condition.--Human clinical testing
shall be taken into account under subparagraph
(A) only to the extent such testing is related
to the use of a drug for the rare disease or
condition for which it was designated under
section 526 of the Federal Food, Drug, and
Cosmetic Act.
(c) Coordination With Credit for Increasing Research
Expenditures.--
(1) In general.--Except as provided in paragraph (2),
any qualified clinical testing expenses for a taxable
year to which an election under this section applies
shall not be taken into account for purposes of
determining the credit allowable under section 41 for
such taxable year.
(2) Expenses included in determining [base period
research expenses] average qualified research
expenses.--Any qualified clinical testing expenses for
any taxable year which are qualified research expenses
(within the meaning of section 41(b)) shall be taken
into account in determining [base period research
expenses] average qualified research expenses for
purposes of applying section 41 to subsequent taxable
years.
(d) Definition and Special Rules.--
(1) Rare disease or condition.--For purposes of this
section, the term ``rare disease or condition'' means
any disease or condition which--
(A) affects less than 200,000 persons in the
United States, or
(B) affects more than 200,000 persons in the
United States but for which there is no
reasonable expectation that the cost of
developing and making available in the United
States a drug for such disease or condition
will be recovered from sales in the United
States of such drug.
Determinations under the preceding sentence with
respect to any drug shall be made on the basis of the
facts and circumstances as of the date such drug is
designated under section 526 of the Federal Food, Drug,
and Cosmetic Act.
(2) Special limitations on foreign testing.--
(A) In general.--No credit shall be allowed
under this section with respect to any clinical
testing conducted outside the United States
unless--
(i) such testing is conducted outside
the United States because there is an
insufficient testing population in the
United States, and
(ii) such testing is conducted by a
United States person or by any other
person who is not related to the
taxpayer to whom the designation under
section 526 of the Federal Food, Drug,
and Cosmetic Act applies.
(B) Special limitation for corporations to
which section 936 applies.--No credit shall be
allowed under this section with respect to any
clinical testing conducted by a corporation to
which an election under section 936 applies.
(3) Certain rules made applicable.--Rules similar to
the rules of paragraphs (1) and (2) of section 41(f)
shall apply for purposes of this section.
(4) Election.--This section shall apply to any
taxpayer for any taxable year only if such taxpayer
elects (at such time and in such manner as the
Secretary may by regulations prescribe) to have this
section apply for such taxable year.
* * * * * * *
Subchapter B--Computation of Taxable Income
* * * * * * *
PART IX--ITEMS NOT DEDUCTIBLE
* * * * * * *
SEC. 280C. CERTAIN EXPENSES FOR WHICH CREDITS ARE ALLOWABLE.
(a) Rule for Employment Credits.--No deduction shall be
allowed for that portion of the wages or salaries paid or
incurred for the taxable year which is equal to the sum of the
credits determined for the taxable year under sections 45A(a),
45P(a), 51(a), and 1396(a), 1400P(b), and 1400R. In the case of
a corporation which is a member of a controlled group of
corporations (within the meaning of section 52(a)) or a trade
or business which is treated as being under common control with
other trades or businesses (within the meaning of section
52(b)), this subsection shall be applied under rules prescribed
by the Secretary similar to the rules applicable under
subsections (a) and (b) of section 52.
(b) Credit for Qualified Clinical Testing Expenses for
Certain Drugs.--
(1) In general.--No deduction shall be allowed for
that portion of the qualified clinical testing expenses
(as defined in section 45C(b)) otherwise allowable as a
deduction for the taxable year which is equal to the
amount of the credit allowable for the taxable year
under section 45C (determined without regard to section
38(c)).
(2) Similar rule where taxpayer capitalizes rather
than deducts expenses.--If--
(A) the amount of the credit allowable for
the taxable year under section 45C (determined
without regard to section 38(c)), exceeds
(B) the amount allowable as a deduction for
the taxable year for qualified clinical testing
expenses (determined without regard to
paragraph (1)),
the amount chargeable to capital account for the
taxable year for such expenses shall be reduced by the
amount of such excess.
(3) Controlled groups.--In the case of a corporation
which is a member of a controlled group of corporations
(within the meaning of section 41(f)(5)) or a trade or
business which is treated as being under common control
with other trades or business (within the meaning of
section 41(f)(1)(B)), this subsection shall be applied
under rules prescribed by the Secretary similar to the
rules applicable under subparagraphs (A) and (B) of
section 41(f)(1).
(c) Credit for Increasing Research Activities.--
(1) In general.--No deduction shall be allowed for
that portion of the qualified research expenses (as
defined in section 41(b)) or [basic research expenses
(as defined in section 41(e)(2))] basic research
payments (as defined in section 41(e)(1)) otherwise
allowable as a deduction for the taxable year which is
equal to the amount of the credit determined for such
taxable year under section 41(a).
(2) Similar rule where taxpayer capitalizes rather
than deducts expenses.--If--
(A) the amount of the credit determined for
the taxable year under section 41(a)(1),
exceeds
(B) the amount allowable as a deduction for
such taxable year for qualified research
expenses or [basic research expenses] basic
research payments (determined without regard to
paragraph (1)),
the amount chargeable to capital account for the
taxable year for such expenses shall be reduced by the
amount of such excess.
(3) Election of reduced credit.--
(A) In general.--In the case of any taxable
year for which an election is made under this
paragraph--
(i) paragraphs (1) and (2) shall not
apply, and
(ii) the amount of the credit under
section 41(a) shall be the amount
determined under subparagraph (B).
(B) Amount of reduced credit.--The amount of
credit determined under this subparagraph for
any taxable year shall be the amount equal to
the excess of--
(i) the amount of credit determined
under section 41(a) without regard to
this paragraph, over
(ii) the product of--
(I) the amount described in
clause (i), and
(II) the maximum rate of tax
under section 11(b)(1).
(C) Election.--An election under this
paragraph for any taxable year shall be made
not later than the time for filing the return
of tax for such year (including extensions),
shall be made on such return, and shall be made
in such manner as the Secretary may prescribe.
Such an election, once made, shall be
irrevocable.
(4) Controlled groups.--Paragraph (3) of subsection
(b) shall apply for purposes of this subsection.
(d) Credit for Low Sulfur Diesel Fuel Production.--The
deductions otherwise allowed under this chapter for the taxable
year shall be reduced by the amount of the credit determined
for the taxable year under section 45H(a).
(e) Mine Rescue Team Training Credit.--No deduction shall be
allowed for that portion of the expenses otherwise allowable as
a deduction for the taxable year which is equal to the amount
of the credit determined for the taxable year under section
45N(a).
(f) Credit for Security of Agricultural Chemicals.--No
deduction shall be allowed for that portion of the expenses
otherwise allowable as a deduction taken into account in
determining the credit under section 45O for the taxable year
which is equal to the amount of the credit determined for such
taxable year under section 45O(a).
(g) Credit for Health Insurance Premiums.--
No deduction shall be allowed for the portion of the
premiums paid by the taxpayer for coverage of 1 or more
individuals under a qualified health plan which is equal to the
amount of the credit determined for the taxable year under
section 36B(a) with respect to such premiums.
(h) Credit for Employee Health Insurance Expenses of Small
Employers.--No deduction shall be allowed for that portion of
the premiums for qualified health plans (as defined in section
1301(a) of the Patient Protection and Affordable Care Act), or
for health insurance coverage in the case of taxable years
beginning in 2010, 2011, 2012, or 2013, paid by an employer
which is equal to the amount of the credit determined under
section 45R(a) with respect to the premiums.
(g) Qualifying Therapeutic Discovery Project Credit.--
(1) In general.--No deduction shall be allowed for
that portion of the qualified investment (as defined in
section 48D(b)) otherwise allowable as a deduction for
the taxable year which--
(A) would be qualified research expenses (as
defined in section 41(b)), basic research
expenses (as defined in section 41(e)(2)), or
qualified clinical testing expenses (as defined
in section 45C(b)) if the credit under section
41 or section 45C were allowed with respect to
such expenses for such taxable year, and
(B) is equal to the amount of the credit
determined for such taxable year under section
48D(a), reduced by--
(i) the amount disallowed as a
deduction by reason of section
48D(e)(2)(B), and
(ii) the amount of any basis
reduction under section 48D(e)(1).
(2) Similar rule where taxpayer capitalizes rather
than deducts expenses.--In the case of expenses
described in paragraph (1)(A) taken into account in
determining the credit under section 48D for the
taxable year, if--
(A) the amount of the portion of the credit
determined under such section with respect to
such expenses, exceeds
(B) the amount allowable as a deduction for
such taxable year for such expenses (determined
without regard to paragraph (1)),
the amount chargeable to capital account for the
taxable year for such expenses shall be reduced by the
amount of such excess.
(3) Controlled groups.--Paragraph (3) of subsection
(b) shall apply for purposes of this subsection.
* * * * * * *
VII. DISSENTING VIEWS
The two permanent tax extender bills approved by the
Republicans at the markup would add more than $224 billion to
the deficit. Together with the seven bills that were approved
by the Republicans in the previous markup, these nine bills
would add more than $317 billion to the deficit. In the 113th
Congress, Ways and Means Committee Republicans selectively
approved 14 of the more than 50 expired tax provisions,
totaling more than $825 billion worth of deficit-financed,
permanent tax cuts. This selective approach failed last
Congress, with none of these permanent provisions being enacted
into law. The bills marked up by the Committee set us down a
partisan path, when we should be embracing bipartisanship and
working in a responsible, bipartisan manner on tax reform.
Even though some of these bills were introduced
individually with some bipartisan support, the opposition to
these bills is based on the position that these tax provisions
should not be made permanent by adding to the deficit without
any revenue offset. The research and experimentation credit is
critical to helping our nation's companies innovate and
compete. But the fiscally irresponsible approach that the
Committee Republicans are taking with respect to this and other
important legislation undermines the bipartisan support that
the provisions enjoy. It is true that this provision was
included in the Republican tax reform plan introduced by the
Ways and Means Committee Chairman last Congress--but the cost
of this provision was responsibly offset in the ten-year
window. Clearly, Chairman Camp recognized the importance of
paying for the permanence of these provisions in the Republican
tax reform plan, and not playing games by passing these
important provisions outside of the important work this
Committee has ahead of it. The American people expect a tax
code that maintains and supports our shared priorities, and
each time the Committee considers these bills in a piecemeal
approach, it is taking a step in the wrong direction and away
from comprehensive tax reform.
We all support provisions that facilitate innovation and
advancement to modernize our economy and enable our companies
to grow and continue to lead. The markup was not to debate the
need for government involvement in spurring research and
development, or the merits of H.R. 880, which would make
permanent the expanded tax credit for research and
experimentation, and expand the credit to ensure that it would
not lose its value for certain taxpayers because of
interactions with the alternative minimum tax system.
Finally, we also oppose the manner in which Republicans are
proceeding--selecting to make permanent another two provisions
today in addition to the previously passed seven provisions at
a cost of more than $317 billion without any offset from the
more than 50 tax provisions that expired at the end of last
year. This approach is both fiscally irresponsible and contrary
to the goals of bipartisan, comprehensive tax reform.
Expired provisions must be dealt with in a comprehensive
manner. The Republicans did not take up other tax extenders
that also are important to Democratic Committee Members. Left
to an uncertain fate are provisions like the Work Opportunity
Tax Credit, the New Markets Tax Credit, and the renewable
energy tax credits, as well as the long-term status of the
Earned Income Tax Credit, the Child Tax Credit, and the
American Opportunity Tax Credit.
Sander M. Levin,
Ranking Member.
[all]