Attorney Urges Treasury Not to Adopt Proposed Research Credit Regs
Attorney Urges Treasury Not to Adopt Proposed Research Credit Regs
- AuthorsMiller, Marjorie
- Institutional AuthorsMiller Group Consultants
- Cross-Reference
- Code Sections
- Subject Area/Tax Topics
- Index Termsresearch credit
- Jurisdictions
- LanguageEnglish
- Tax Analysts Document NumberDoc 2000-23255 (4 original pages)
- Tax Analysts Electronic Citation2000 TNT 175-20
=============== SUMMARY ===============
Marjorie Miller of the Miller Group Consultants, Portland, Ore., has urged Treasury not to adopt the proposed research credit regs. (For a summary of REG-105170-97, see Tax Notes, Dec. 7, 1998, p. 1186; for the full text, see Doc 98-34970 (10 pages) or 98 TNT 234-84 .) According to Miller, implementation of the proposed regs will "absolutely nullify" the research credit for most small businesses. The proposed regs' formal planning process for qualified experimental activity and narrow definition of "science," she says, is not in line with how small businesses operate and will preclude those businesses from receiving any research credit benefits.
=============== FULL TEXT ===============
August 17, 2000
Joe Mikrug, Legislative Counsel
1500 Pennsylvania Avenue
Room 1308
Washington D.C. 20220
(202) 622-0180
RE: Sections 1.41-1 Proposed Regulations
Dear Joe:
[1] Small business will suffer greatly if the Proposed Regulations are finalized. I am writing this letter in protest to the Proposed Regulations for the Credit for Increasing Research Activities (section 1.41-1).
[2] Small Business is slowly becoming aware of the Research Tax Credit. Trust me when I say that the Proposed Regulations for section 41 referenced above will eliminate the R&E Tax Credit benefits for small business. The irony of this is that small businesses are the primary originators of new process and product technologies that are later utilized profitably by larger business enterprises. Small businesses are more creative. They are more motivated to use technology to differentiate their products and services. The economic risk of unsuccessful R&E activities is disproportionately great for small businesses with limited resources. They are more likely to place an emphasis on developing technology rather than on maintaining elaborate reports and substantiating records (which they consider nonproductive). Even though their total numbers are great, they are the least represented in the political forum and unlikely to even be aware of the new proposed regulations. Small businesses that have made decisions for R&E projects based partly on their experiences with the current regulations and knowledge of the tax credit extension through 2004 will be bitterly disappointed to discover what is happening to their tax incentive. They are the most deserving recipients of the R&E Tax Credit benefits. They are about to lose their R&E Tax Credit opportunities without any change in legislative intent by their elected Congress.
[3] Congress passed section 41, Credit for Increasing Research Activities, to encourage U.S. business to develop new technologies, to experiment with new processes that will make them more efficient and to seek new and improved products or materials. It hasn't been easy for business, particularly small business, to take advantage of the tax credit or to use the tax credit as an incentive to take the risks inherent with developing new technology. The credit is not permanent and it hasn't been continuous (there was a hiatus period July 1, 1995 through June 30, 1996 in which the tax credit was suspended). The good news for small business has been that the tax credit was been extended through June 30, 2004. Even though there is a deferral of the benefit during the first eighteen months of the recent extension, small business has finally been able to plan and use the tax credit as the incentive for innovation that it was originally intended to be. The R&E Tax Credit, in its present form, can support small businesses in their efforts to develop new technology by sharing a small part of their expenses.
[4] The small businesses that I work with regularly are truly innovative and do amazing work with limited resources. They often take development risks that larger businesses avoid.
[5] Large publicly traded corporations have multiple tiers of management, high overhead structures, numerous divisions or departments, elaborate administrative procedure, narrowly defined areas of responsibility, highly formal decision-making processes and, not incidentally, substantial legal and accounting resources to help them get tax credit benefits. They tend to pursue technological improvements with limited objectives and guaranteed payback. At large businesses, technology advances slowly and there is little economic risk.
[6] Smaller companies have few levels of management. Managers and key decision-makers tend to have technical expertise and are directly involved in R&E activities. Creativity drives technological change. There is often a very high level of commitment and participation by company personnel. Technology advances rapidly and there is considerable economic risk.
[7] The small businesses that qualify for the tax credit in its present state are creating important technological advances for benefit of many other businesses. The tax credit can help compensate them for the cost of developing new technology and encourage them to pursue innovative product and process concepts. The Proposed Regulations will not only have a strong chilling effect -- it will absolutely destroy a small business owner's tax credit incentive to take risks and put their business on the line in the pursuit of innovation.
[8] Implementation of the Proposed Regulations will absolutely nullify the R&E credit for most businesses. This is not an overly dramatic statement. In order to understand the actual impact of the proposed regulations I have applied the Proposed Regulations to the historical activities of my small business clients, who currently benefit from the R&E tax credit. I used the measure of small business to be from $5-$50 million in annual gross receipts. The businesses cover a wide variety of industries, from providers of new manufacturing technology to computer chip manufacturers, to plastic bag manufacturers. They annually create and utilize a wide variety of new technologies. NOT ONE of those businesses would be able to meet the extreme standards set by the Treasury in the Proposed Regulations. NOT ONE of those companies could use the R&E tax credit to partly offset the risk of developing these new technologies. The Treasury has set the bar so high, using subjective standards, that none of the currently qualified activities (many of them substantiated in IRS audits) would certainly qualify. I can not contemplate realistic hypothetical situations in which these same companies (many of whom have made project commitments in anticipation of the R&E tax credit impact) could utilize the R&E Tax Credit under the Proposed Regulation standards.
[9] My smaller clients are truly the innovators and the backbone of the U.S. economy. "Small Business is Big Business," as stated by Charles Rossotti. Small businesses are responsible for most of the valuable research that takes place in the U.S. They risk their livelihood each time that they experiment with a new technology, product, process, or material. They try to be innovative not for extraordinary profit, but to remain competitive and keep their doors open. A failure in one major R&E project can have devastating results. Small business owners can add real value to the American economy with small tax incentives. It is counter productive to take this incentive away.
[10] In measuring the effectiveness of the tax credit, the Treasury apparently focuses on one side of the equation -- how does the credit impact federal revenue? The other side of the equation, the value of the incentive, particularly for small business, does not seem to be factored in. In this competitive global economy, small business needs real incentives and real encouragement to take the risks of developing new technology. The global playing field is not level. U.S. businesses are competing against foreign companies that receive large government subsidies. U.S. businesses need a useful R&E Tax Credit to assist them with their very valuable, very productive R&E expenditures.
[11] The purpose of this letter is not to suggest broadening the interpretation of the R&E Tax Credit (even though that might be a good idea). I do suggest that the section 41 Tax Credit be allowed to continue in a form that is helpful to small businesses that participate in "qualified R&E activities" AS ORIGINALLY DEFINED BY CONGRESS.
[12] The Proposed Regulations severely limit the R&E tax credit in a way that is contrary to the intent of Congress. Small businesses will suffer disproportionately from the Proposed Regulations. In the long run, the U.S. economy, which is bolstered by new technology, will be diminished as a result of the Proposed Regulations.
[13] PROPOSED REGULATIONS - SPECIFIC IMPACTS ON SMALL BUSINESS:
1. The proposed Regulations require a formal planning process
for all qualified "experimental" activity. Formal planning
must be documents from the decision point to proceed with the
"experimental" activity to full production. Small business
does not operate that way. Most don't have the personnel for
such a process. These additional layers of bureaucracy are
more common in larger businesses. In a small business, when a
project gets a green light -- everybody pitches in just to
get it done. Job descriptions become blurred. Requiring a
formal, fully documented process will basically preclude
small business from receiving any research tax credit
benefits.
2. Another huge obstacle in the proposed Regulations is the
issue of defining science that qualifies for the tax credit.
IRS examiners that I have spoken to and worked with on
audits, define science to be of a Nobel prize winning
standard. All other science has, in their opinion, either
been thought of before or should have been thought of before.
There is never any basis for this position. In some cases, an
examiner had read about a similar technology in a trade
magazine and concluded that the science was known. In other
cases it is purely a subjective gut feel on the part of the
examiner (who has had no real life experience in the area at
all). The proposed Regulations allow examiners to place
unrealistic and impossible to achieve standards on
businesses. As a result, the Research Tax Credit is
disallowed for all but the extreme cases.
[14] I ask on behalf of my clients and all the businesses that are currently unaware of the coming change: Please do not let these Proposed Regulations be formally adopted.
Sincerely,
Marjorie Miller
Partner
The Miller Group --
Consultants
Portland, Oregon
Cc: John Talisman, Office of Tax Policy
- AuthorsMiller, Marjorie
- Institutional AuthorsMiller Group Consultants
- Cross-Reference
- Code Sections
- Subject Area/Tax Topics
- Index Termsresearch credit
- Jurisdictions
- LanguageEnglish
- Tax Analysts Document NumberDoc 2000-23255 (4 original pages)
- Tax Analysts Electronic Citation2000 TNT 175-20