ALTERNATIVE SIMPLIFIED R&D CREDIT

How Does the Alternative Simplified Credit Work?

The alternative simplified credit equals 12 percent of the excess of current-year qualified research expenses ("QREs"), as defined under section 41(b), over 50 percent of the taxpayer's average QREs for the prior three years. For start-up taxpayers, the credit would equal 6 percent of current-year QREs.

The election could be made for taxable years ending after the date of enactment, and would apply to that taxable year and all subsequent taxable years unless revoked with the consent of the Secretary of Treasury. Taxpayers that have previously elected the AIRC could apply the new computational rules or to continue to calculate the credit under the AIRC rules.

Who Would Benefit from the Alternative Simplified Credit?

The credit would be utilized by many companies performing significant amounts of R&D in the United States that are unable to claim the regular credit because of changes in business models and economic circumstances. For example, many taxpayers are no longer able to qualify for the regular credit because their R&D spending relative to gross receipts has not kept pace with the ratio set in the "base period" that governs eligibility for the regular credit. This can happen, for example, where a company's sales increase significantly in the intervening years, where a company enters into an additional line of business that generates additional gross receipts but performs little R&D, or where a company spends less to perform the same amount of R&D because it becomes more efficient in its R&D processes.

A wide variety of industries would utilize the alternative simplified credit, including the automotive industry, chemical manufacturers, aerospace and defense companies, telecommunications, and information technology companies, among others.

Why is More than One Credit Mechanism Needed?

For many companies, the regular credit is operating to provide a strong incentive to increase R&D activities in the United States. For others, a new credit calculation is necessary to account for different business structures and changing economic circumstances. A "one-size-fits-all" approach would have the effect of discouraging continued U.S. R&D investment by some companies and industries.

Does the Alternative Simplified Credit Provide an Incentive to Increase U.S. R&D Spending?

Yes. The credit will provide a higher effective credit rate for taxpayers increasing R&D spending from year to year. Consider the effective credit rates of two companies investing $100M in R&D in 2003 (assuming the election first becomes effective this year):

Increasing R&D Spending

2000 2001 2002 2003

QRE

$85M $90M $95M $100M

50% "base"

--- --- --- $45M

Creditable amount

--- --- --- $55M

Credit (12%)

--- --- --- $6.6M

Effective credit rate

--- --- --- 6.6%

Declining R&D Spending

2000 2001 2002 2003

QRE

$115M $110M $105M $100M

50% "base"

--- --- ---

$55M

Creditable amount

--- --- --- $45M

Credit (12%)

--- --- --- $5.4M

Effective credit rate

--- --- ---

5.4%

How Will the Alternative Simplified Credit Improve U.S. R&D Incentives Relative to Those of Our Trading Partners?

The United States is engaged in a global battle to attract R&D investment. Canada, France, the Netherlands, Australia, Japan, and the United Kingdom are among the countries that offer richer incentives for R&D investment than the United States. Canada, for example, provides a 20-percent flat credit for R&D spending (including not only wages but also capital expenditures) in Canada.

The alternative simplified credit will provide a meaningful incentive for many companies to perform R&D activities in the United States as opposed to other countries that provide more substantial incentives for such activities. Increased R&D activities in the United States will have a positive impact on U.S. jobs. Maintaining U.S. technology ownership also will foster U.S. competitiveness and strategic interests.