Written by: Onosetale Aigbe
The Research and Development (R&D) Tax Credit, formally known in the Internal Revenue Code as, Credit for Increasing Research Activities, was established by the U.S. Congress in 1981 and made permanent in 2015. The U.S. Congress recognized the immense benefits of tax credits and their urgent need to businesses around the country and extended the credit up to fifteen times before establishing the tax credit permanently. Businesses looking to claim the credit must be on U.S soil and must engage in research and development activities as stated in IRC Section 41 (d) and Treasury Regulations Section 174. Businesses must discover technical information or process of a new improved business component and eliminate technical uncertainty of the capability, methodology or design of the business component. These companies must also undergo a systematic or iterative process of evaluating alternatives to resolve uncertainty and all activities must be rooted in verifiable hard sciences like engineering and computer science.
There are many substantial positive economic benefits the R&D tax credit legislation brings to the United States economy. The intent of the credit was to reward companies that partake in research, innovation and experimental activities on U.S. Since the credit was established, it has had profound and influential effects in many sectors of the U.S. economy. The paper, The Estimates State-Level Employment Impact of Enhancing Federal R&D Tax Incentives, determined that approximately 81,000 jobs (24 per 10,000 people) would be created if the R&D tax credit was allowed contrary to the new legislations of Section 174 in 2022 [1] which states that research and experimental expenses be amortized for a five-year period. The paper also calculated that 188,000 jobs (57 per 10,000 people) would be created if the R&D tax credit rate was doubled [1]. Another paper, Profile of Firms Taking the R&D Credits, summarized the result of the survey conducted by Washington State University Social and Economic Sciences Research Center, and noted that firms taking the R&D Credit created 19,459 new jobs in Washington State within a one-year period. Out of the 19,459 jobs, about 5,614 jobs, representing 29%, were research and development jobs [2]. Other papers like Enhanced Tax Incentives for R&D Would Make Americans Richer [3] and Effectiveness of Research and Experimentation Tax Credits: Critical Literature Review and Research Design [4], also outlined the direct and indirect impacts of the R&D tax credit to increased employment in the U.S. Overall, the R&D tax credit has continued to boost economic growth, foster innovation, encourage investments, stimulate competitiveness and collaboration and promote long term sustainability of the U.S. economy.
Economic Growth
There is no doubt that R&D tax credit have had immense impact on the growth of the U.S. economy. In the research publication, The Impact of State-level R&D Tax Credit on the Quantity and Quality of Entrepreneurship, it was observed that at state level, R&D tax credit has a steady and positive impact in the rate of entrepreneurship and the ability of high potential startups to achieve economic growth objectives [5]. The publication concludes that counties with R&D tax credit incentives show a 2% growth per year in the rise of new businesses and 20% growth over a ten-year period. The positive effects of the R&D tax credit not only influence private businesses but the larger U.S. economy. Increasing R&D expenditures can lead to productivity gains, advancement of technology, effectiveness and capabilities in the STEM, Architectural and other sectors of the U. S. economy. More investments in R&D expenditures translates to higher productivity which relates directly to increased job creation, higher employment opportunities, increased consumer spending and higher tax revenues for the government which is a win for businesses and the government.
Encouraging Investment
The availability of R&D tax credits incentivizes both large corporations and small businesses to invest more in research and development activities through investments in employee’s skill development (tuition reimbursements, etc.), hiring experts, focusing on research and best practices, and developing new processes and machineries that fuel technology and innovations. Access to financial incentives like R&D tax credit plays a key role in the creation of new jobs, re-training of employees, fostering entrepreneurship and competitiveness and attracting foreign investments to the U.S. for long-term sustainability and growth.
Promoting Collaboration
One of the many benefits of R&D tax credit is the promotion of collaboration between participating businesses, supporting institutions like research institutes, universities, and government agencies. Collaboration between these entities advances discovery and innovation and offers opportunities to leverage economics of scale between entities. The sharing of best practices and lessons learnt from research and development has the resultant effect of engendering discovery and the exponential growth of businesses in the economy.
Ensuring Long-Term Sustainability
As the U.S. continues to invest in research and development, the initiative helps the sustainability of businesses and the viability of the U.S. economy. The R&D tax credit supports businesses to continue research and development projects with the assurance of financial security. The R&D tax credits stimulate research ventures and lay the critical groundwork for future economic growth and prosperity that will enable the United States to maintain its leadership and competitive position in the global marketplace.
Stimulating Competitiveness
It is important to maintain competitiveness in a global economy that is continuously evolving. The R&D tax credit is a monetary motivator for businesses to maintain a competitive edge in research, development and innovation nationally and internationally. Businesses are motivated to develop new or improved technologies, products, formulations, software and manufacturing processes. U.S. businesses are working to automate many processes by implementing the latest technologies like Artificial Intelligence to refine the quality of their products and services and to be at the leading edge of the world’s technological evolution.
The Research and Development Tax Credit is of substantial merit and national importance to the U.S., specifically its societal welfare, businesses, and the U.S. economy in general. As our daily lives and needs continue to evolve, so also is the increasing need for business investments in research, innovation, and product development to meet the ever-changing needs of the society. My work as an R&D technical tax credit consultant in the R&D tax consulting industry offers me the unique opportunity to provide the critical support required to enhance and stimulate the growth of research and development carried-out by U.S. companies which is a major factor that contributes to the growth and advancement of the U.S. economy.
References
- Clay, I. (2023, September 20). Estimated state-level employment impact of enhancing federal R&D tax incentives. RSS. https://itif.org/publications/2023/02/15/estimated-state-level-employment-impact-of-enhancing-federal-r-and-d-tax-incentives/#
- Washington Department of Revenue. (n.d.). Chapter 5 – Profiles Of Firms Taking The R&D Credit. https://dor.wa.gov/sites/default/files/2022-02/chapter5.pdf.
- John Lester and Jacek Warda, “Enhanced Tax Incentives for R&D Would Make Americans Richer” (ITIF, September 2020), https://itif.org/publications/2020/09/08/enhanced-tax-incentives-rd-would-make-americans-richer/.
- Bronwyn H. Hall, “Effectiveness of Research and Experimentation Tax Credits: Critical Literature Review and Research Design” (Washington, D.C.: U.S. Congress, Office of Technology Assessment, 1995), https://eml.berkeley.edu/~bhhall/papers/BHH95%20OTArtax.pdf
- Fazio, C., Guzman, J., & Stern, S. (July 2019); The Impact Of State-Level R&D Tax Credits on The Quantity and Quality of Entrepreneurship. (https://www.nber.org/system/files/working_papers/w26099/w26099.pdf ).\
