RESEARCH AND DEVELOPMENT TAX CREDITS EXTENDED TO JUNE 30, 1995 IN BUDGET PACKAGE

RESEARCH AND DEVELOPMENT TAX CREDITS EXTENDED TO JUNE 30, 1995 IN BUDGET PACKAGE passed by the Senate on Aug. 6 in a 51-50 vote. The House approved the reconciliation bill (HR 2264) Aug. 5 by a vote of 218-216. Produced by a House-Senate conference committee on Aug. 4, the budget measure also makes the R&D credit retroactive to July 1, 1992, when it had expired. An earlier draft of the bill adopted by the Senate in June extended the credit only one year, from July 1993 to June 1994. To score budgetary savings, the Senate would have left R&D expenditures for the year July 1992-June 1993 uncredited. The final legislation, however, is not as generous as the House-passed bill, which would have made the R&D tax credit permanent, retroactive to July 1992. The conference agreement follows the Senate approach to amending the Section 936 tax credit. An "explanatory statement" of the legislation by the conference committee notes that current law permits corporations with subsidiaries in U.S. possessions (Puerto Rico, Guam, American Samoa, the Virgin Islands and the Northern Mariana Islands) to eliminate "U.S. tax on certain income related to their operations in the possessions" under a set of complex rules. The Senate bill would have reduced the credit generally by 2.5% and required one of two alternative limitations: a "percentage" limitation or an "economic activity" limitation. The percentage option would limit the credit in 1994 to 60% of the credit permitted under current law, and the credit would be pared back an additional 5% each year until 1998, when the maximum allowable credit equals 40% of the benefit under current law. The economic activity option would limit the credit to 95% of compensation and depreciation deductions claimed for island facilities. In addition, a corporation using the second alternative could add to the credit any possession income taxes paid by the corporation, but only when using a means other than the profit-split method (such as cost sharing) for allocating income from intangible property. The House bill essentially would have limited the credit to a 60% wage credit. The conference committee deleted the Senate amendment's general 2.5% reduction in the credit and altered the economic- activity base so that it "includes 60% of qualified compensation; 15% of depreciation deductions for short-life qualified tangible property, 40% of depreciation deductions for medium-life qualified tangible property and 65% of depreciation deductions for long-life qualified tangible property," the explanation states. In addition, the final bill "provides that there is no disallowance for deductions for compensation or depreciation amounts which are included in the credit-limitation base." The legislation also provides a long-term venture capital gains exclusion. The benefit, which reflects a provision passed by the House but omitted from the Senate bill, permits "a noncorporate taxpayer who holds qualified small business stock for more than five years to exclude 50% of any gain on the sale or exchange of the stock," the summary states.