and Development (R&D) Tax Credit

An association of 62 leading Internal Revenue Code Section 41 public and private research universities

Boston University Brandeis University Brown University What is It? California Institute of Carnegie Mellon University Case Western Reserve University  The federal Research and Development Tax Credit (“R&D tax credit”) is a Columbia University tax credit for qualified research expenses that can be deducted from overall corporate Cornell University Duke University income taxes. Emory University Georgia Institute of Technology  Qualified research expenses include: certain labor and wage costs for performing Harvard University research activities “in-house;” certain supplies used in conducting research; and a Indiana University Iowa State University percentage of costs associated with “contract research expenses.” The credit only The Johns Hopkins University applies to research performed in the United States. Massachusetts Institute of Technology McGill University Michigan State University  The traditional R&D tax credit provides a 20 percent credit for qualified research New York University expenses that exceed the taxpayer’s base amount (determined by reference to the Northwestern University taxpayer’s research expenses during the mid 1980s and the taxpayer’s recent gross The Ohio State University The Pennsylvania State University receipts). In lieu of the traditional credit, taxpayers may elect to claim the Alternative Princeton University Simplified Credit (ASC). The ASC provides a 14 percent credit for qualified research Purdue University in excess of 50 percent of a company’s prior three-year average qualified research Rice University expenses. Rutgers, The State University of New Jersey Stanford University Stony Brook University - State University  Under certain circumstances, can also claim a credit if they fund of New York qualified research at another organization such as a university or other research Texas A&M University Tulane University organizations. In such instances, a business can claim only 65 percent or 75 percent The University of Arizona (as compared to 100 percent for in-house R&D expenditures) of qualifying University at Buffalo, The State University expenditures toward the tax credit. The 75 percent rate applies only to qualified of New York University of California, Berkeley research organizations (such as universities or research consortiums), which are tax- University of California, Davis exempt entities organized primarily to conduct scientific research and which are not University of California, Irvine private foundations. University of California, Los Angeles University of California, San Diego University of California, Santa Barbara The University of Chicago Background University of Colorado at Boulder University of Florida University of Illinois at Urbana-Champaign  The R&D tax credit is designed to encourage companies to make new discoveries and The University of Iowa advancements and to partner with entities, such as universities, and other The University of Kansas organizations to conduct research and development activities. Because the tax credit University of Maryland, College Park University of Michigan can only be taken for R&D activities performed in the U.S., it helps fuel our nation’s University of Minnesota, Twin Cities competitiveness and economic and national security by encouraging greater R&D University of Missouri-Columbia investment and fostering the creation and retention of domestic high-skilled jobs. The University of North Carolina at Chapel Hill University of Oregon  Originally enacted in 1981, the R&D tax credit is not a permanent part of the Internal University of Pennsylvania Revenue Code, but has been allowed to expire on a number of occasions since. University of Pittsburgh University of Rochester However, it has been renewed each time, sometimes retroactively. It was renewed for University of Southern California the 15th time since 1981 as part of the American Taxpayer Relief Tax Act of 2012 and The University of Texas at Austin which included a one-year retroactive and one-year prospective extension of the R&D University of Toronto tax credit. The R&D tax credit expired on December 31, 2013. University of Virginia University of Washington The University of Wisconsin-Madison Vanderbilt University Washington University in St. Louis Yale University

The R&D Tax Credit and Universities

 Current law allows companies to claim the R&D tax credit for research and development activities conducted at universities or other qualifying organizations, including research consortiums which may include universities.

 Universities benefit indirectly from the R&D tax credit. The tax credit encourages to take on new research and development challenges that are important to industry but also well-suited to academic research.

 When companies contract with universities to conduct R&D, faculty and graduate students benefit from receiving complex academic and practical research problems and the financial support to study them. The R&D tax credit, in turn, promotes greater collaboration between industry and universities. This in turn leads to R&D-based employment opportunities for students and graduates.

 The R&D tax credit also fosters start-up companies, many of which are a result of new developed at universities as a result of industry-funded research.

Potential Reforms

 The current R&D credit could be improved by providing greater incentives for companies to partner with universities for R&D. This would include increasing the tax credit for R&D activities conducted at universities and other research entities so that it equals the benefit provided for “in-house” research. In addition, making the R&D tax credit permanent would significantly improve its effectiveness, since industry could reliably plan for R&D expenditures and their tax implications. This is particularly important for research that takes several years.

Additional Information

 R&D Credit Coalition website – http://www.investinamericasfuture.org/.

 “Expanding the R&D Tax Credit to Drive , Competitiveness and Prosperity” by Dr. Robert D. Atkinson, April 2007 – http://www.itif.org/files/ExpandR&D.pdf.

– March 2014