The History of the Research and Development (R&D) Tax Credit: the US Government’s path to supporting innovation

Nov 16 2023 | John Bruner

1207

The History of the Research and Development (R&D) Tax Credit: the US Government’s path to supporting innovation

Nov 16 2023 | John Bruner

1207

▷ Seeds of Innovation (1950s – 1970s)
▷ Legislation Takes Root (1980s – 1990s)
▷ Maturation and Expansion (2000s – 2010s)
▷ R&D is Enshrined (2010s – Present)
▷ FAQs
▷ Citations

Introduction

In the tapestry of economic growth and innovation, small- and medium- sized businesses (SMBs) stand as pioneers, shaping the future with their creativity and economic contributions. They are fueled by innovation, but, ironically, SMBs often overlook the Research and Development (R&D) tax credit. Alternatively and flexibly known as the Research and Experimentation (R&E) tax credit, these financial incentives transform the way businesses grow and play a pivotal role in the evolution of processes and technologies. The history of the R&D tax credit unveils a narrative of resilience, adaptability, and empowerment for SMBs. In this blog, I walk-through a chronological exploration of this evolution and discuss why the R&D’s impact on business should not be overlooked. There is a concluding FAQ section, and, should you have any further questions or wish to explore how your SMB qualifies, please schedule some time with me!

Seeds of Innovation (1950s – 1970s)

The roots of the R&D tax credit are traced back to the mid-20th century when industrialized nations sought ways to foster mechanical and scientific advancement. In the post-World War II era, governments recognized the pivotal role of research and development in driving economic progress. In a worldwide sense, the United States led the way with the introduction of investment tax credits in the 1960s, laying the foundation for future incentives aimed at stimulating R&D activities among businesses. It was a prescient moment for the US government- understanding that fiscal motivators in the form of tax credits would engage forward-thinking businesses and foster a culture of creativity.

Legislation Takes Root (1980s – 1990s)

The 1980s witnessed a significant milestone with the enactment of R&D Tax Credits in the United States under the Economic Recovery Tax Act of 1981 (ERTA). Sponsored by Senator William Roth and Representative Jack Kemp, and signed by President Reagan, the ERTA provided businesses with a clear, written financial incentive to invest in their innovation. The credit allowed companies to offset a portion of their research expenses against their tax liabilities, which encouraged inventiveness across various industries. It also included the “Discovery Rule” which delineated qualified activities. This was the dawn of the internet era: a time of risk-taking that would bear enormous fruit and would steam the United States economic engine forward on its course of ingenuity. The concept of R&D tax credits gained traction and other nations, including Canada and the United Kingdom, introduced similar tax incentives. A wave of research-driven policy swept the globe. There was one caveat about this early-version of R&D: the credit was written as a temporary measure in the ERTA. It had an expiration date of December 31, 1985. Seeing its popularity and effectiveness, R&D was temporarily extended in the Tax Reform Act of 1986, and again fifteen (!) more times in the years to come leaving the R&D credit in a state of fluctuation during the 1990s.

Maturation and Expansion (2000s – 2010s)

The dawn of the new millennium expedited an era of technological revolution and unprecedented inventiveness. The R&D tax credit evolved in tandem with these advancements, adapting to the definition of what research and development meant to businesses. In 2001, a major change to the R&D credit was made to definition of the “Discovery Rule.” Instead of qualified activities defined as “new to the world,” the new definition simply stated they be “new to the taxpayer.” Further flexibility was reflected when Alternative Simplified Credit (ASC) was enacted, allowing businesses to both alter and be more flexible in credit calculations. Governments recognized the diverse nature of innovation and expanded the scope of eligible activities beyond traditional scientific research to include areas such as software development, engineering, and experimental design. This broadened category definition enabled a wider array of businesses, especially SMBs, to benefit from these incentives and nurtured a culture of entrepreneurship.

R&D is Enshrined (2010s – Present)

As the world economy grew more and more competitive, the importance of R&D tax credit policies became evident. It was time to stop kicking the can and enshrine the R&D tax credit as a permanent part of US growth. The Protecting Americans from Tax Hikes Act (PATH ACT) of 2015 did exactly that, making the R&D tax credit a permanent fixture in US tax code. It also turned off what is known as Alternative Minimum Tax (AMT), which allowed businesses with $50 million or less in gross receipts to claim. The 2010s also saw the Tax Cuts and Jobs Act (2018) make R&D credits more achievable by further reducing AMT guidelines for S-corps and C-corps. By this time, the definition of innovation had grown from simply “manufacturing advances” to a mature version that covered hours of labor, both in-house and outsourced (within US borders), spent engaging with complex modern problems such as climate change, alternative energies, and artificial intelligence. The foundation of the R&D credit remained the same but modern economic houses were built very differently.

The journey of the Research and Development Tax Credit from its humble beginnings in the ERTA of 1981 to its current permanent status is a testament to the resilience of businesses and the adaptability of United States economic policies. For today’s SMBs, these incentives are a beacon of support that empower leaders to dream, explore, and engage without the burden of excessive financial constraints. It is now evident that R&D tax credits do not simply shape industries- they nurture the very essence of progress and creativity. These incentives will continue to pave the way for a future where small- and medium-sized businesses play a leading role in shaping the world of tomorrow. Have you scheduled a consultation to learn more about qualification and calculation for the R&D Tax Credit? Use this link to schedule a time that fits your calendar- it could be the first step to uncovering hidden funds for your business.

FAQs

Is the Research and Experimentation (R&D) tax credit permanent?

Yes, though it began as a temporary measure in the Economic Recovery Tax Act of 1981, it was first extended by the Tax Reform Act of 1986, extended 15 more times thereafter, and officially made permanent at the end of 2015 in the Protecting Americans from Tax Hikes Act (PATH Act)

What are the benefits of the R&D tax credit?

The R&D tax credit is critical for businesses to maintain an edge on their competition by optimizing efficiency and maximizing the amount of buckets where funds are available.

Why was the R&D tax credit created?

To foster innovation amongst United States businesses and to keep up with the rapidly evolving economic landscape of the 1980s-on.

Does my business qualify for the R&D tax credit?

Potentially, depending on a litany of different criteria. Schedule time with an Occams Advisory R&D tax professional to begin exploring this for your business!

How much does my business qualify for?

Often times, calculation of the proper R&D tax credit for your business can be confusing. We understand this and encourage you to schedule time with us to learn more.