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Tax Law

Joel S. Newman on the Tax Treatment of Research & Development Under IRC Section 41

Since its inception as part of the 1981 Tax Act, the research and development tax credit under IRC Sec. 41 has expired and been reinstated many times. The credit lapsed as of December 31, 2011, but is expected to be reinstated again in some form. Treasury has attempted to draft regulations governing research and development tax treatment, and the Internal Revenue Service has also addressed research and development in three recent pronouncements. The analysis discusses the attempts by Treasury to draft regulations governing research and development tax treatment, and also covers pronouncements by the Internal Revenue Service to address research and development activities.

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The Obama Administration wants to expand and simplify the credit. Also, it wants to make it permanent. [Report, U.S. Treas. Dep't., Office of Tax Policy, Investing in U.S. Competitiveness: The Benefits of Enhancing the Research and Experimentation (R&E) Credit (March 25, 2011).]

In addition, Senators Baucus and Hatch, who are, respectively, the Chairman and Ranking Member of the Senate Finance Committee, have co-sponsored the Greater Research Opportunities with Tax Help (GROWTH) Act. [S 1577, 112th Cong, 1st Sess. See Senate Finance Committee Press Release: Baucus, Hatch Look to Boost Innovative American Industries, Provide Certainty with Permanent Research and Development Credit. 2011ARD 180-7, Sept 19, 2011. For expressions of support for S 1577, see "alliant group Strongly Supports GROWTH Act,"] The GROWTH Act would allow the traditional Section 41 credit to expire, raise the percentage on the alternative simplified credit to 20 percent, and make the whole thing permanent.

Either the Administration proposal or the GROWTH Act would be a huge improvement. However, even if neither one of these proposals comes to fruition, one could at least hope that the current Section 41 credit will be extended once again.

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Joel S. Newman is a Professor of Law at Wake Forest School of Law in North Carolina. Before teaching at Wake Forest, he taught as a visiting professor at the University of Hawaii, University of Florida, Notre Dame and Xiamen University, in the People's Republic of China. Professor Newman has also served as a consultant for CEELI, the ABA's rule of law initiative, for projects in Lithuania, Macedonia, Slovakia, Uzbekistan, Ukraine, and St. Petersburg, Russia. He has also been an Associate with Shearman & Sterling in New York, and with Frederickson, Byron, Colborn, Bisbee & Hansen, in Minneapolis.

Information referenced herein is provided for educational purposes only. For legal advice applicable to the facts of your particular situation, you should obtain the services of a qualified attorney licensed to practice law in your state.

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