What Happens When the R & D Tax Credit Expires?

In Case Law

Many companies spend years developing their research and development programs and each year they apply for the R&D tax credit. The credit isn’t a law that simply exists. Like many other tax programs, it expires and Congress has to renew it for another term.

Last year, the credit expired and it has yet to be renewed. While there is every reason to think the government will renew it again, it isn’t guaranteed. In that event, it can impact companies in many ways, leading to loss in profits and both consumer and investor confidence.

The First Quarter

When companies that qualified for the tax credit last year reported profits, they would have included all the money saved from the credit in those first quarter earnings. That’s four quarters of tax credit savings reported in the first. Without the certainty of the credit, this year they’ll have zero. That can have a significant impact on their profitability projections for shareholders. The company can attribute the losses to the non-renewal of the tax credit, but that may not be enough for shareholders reading their reports.

Results and Research

The budget that the company provides the research and development division with often includes an offset from the tax credit. Without that guarantee of that credit, budgets can be slashed. This not only slows down research and results but can also lead to layoffs and putting off the purchase of much needed equipment. The impact trickles down to contractors and anyone else associated with research and development and the business itself.

Stocks

For publicly traded companies, the loss of the tax credit and the revisions of profit projections can cause a fluctuation in the stock market. Nervous investors may begin selling stocks and driving the price down in an effort to decrease their overall risk. Falling stock prices are never a good omen for investors and shareholders. In the short term, it can have a negative impact on stocks, but given likelihood of extensions, it will not have a long term negative impact.

Permanence

According to theWall Street Journal, both Presidents George Bush and Barack Obama had considered making the tax credit a permanent fixture in the tax laws. This would eliminate the need for renewal. The problem with making it permanent would be the cost. The Journal reports that the cost of the last two-year extension over 10 years was about $14.3 billion, but making it permanent would cost about $100 billion over 10 years.

Companies that deal with research and development are counting on this research to create a better product and help them achieve a better bottom line. When the tax credit is not renewed, then it can play havoc with their overall R&D plan. Companies stay successful through planning and strategy, and while there may be a backup plan for when the credit expires, there is simply no way to get that money back without significant changes to the R&D program.

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