H.R. 1712 – Research and Development Tax Credit Act of 2007

110th CONGRESS

1st Session

H. R. 1712

IN THE HOUSE OF REPRESENTATIVES

March 27, 2007

Ms. Eddie Bernice Johnson of Texas introduced the following bill; which was referred to the Committee on Ways and Means

A BILL

To amend the Internal Revenue Code of 1986 to provide incentives to improve America’s research competitiveness, and for other purposes.

Short title

This Act may be cited as theResearch and Development Tax Credit Act of 2007.

Simplification of research and development credit

(a)

Simplified Credit for Qualified Research Expenses

(1)

In general

Subsection (a) of section 41 of the Internal Revenue Code of 1986 (relating to credit for increasing research activities) is amended to read as follows:

(a)

Determination of Credit

(1)

In general

For purposes of section 38, the research credit determined under this section for the taxable year shall be equal to 20 percent of so much of the qualified research expenses for such taxable year as exceeds 50 percent of the average qualified research expenses for the 3 taxable years preceding the taxable year for which the credit is being determined.

(2)

Special rule in case of no qualified research expenses in any of 3 preceding taxable years

(A)

Taxpayers to which paragraph applies

The credit under this section shall be determined under this paragraph if the taxpayer has no qualified research expenses in at least 1 of the 3 taxable years preceding the taxable year for which the credit is being determined.

(B)

Credit rate

The credit determined under this paragraph shall be equal to 10 percent of the qualified research expenses for the taxable year.

(2)

Conforming amendment

Section 41 of such Code, as amended by section 104 of division A of the Tax Relief and Health Care Act of 2006, is amended by striking subsection (c).

(b)

Uniform Reimbursement Rates for All Contract Research Expenses Other Than Amounts Paid for Basic Research

(1)

In general

Section 41(b)(3) of the Internal Revenue Code of 1986 (relating to contract research expenses) is amended—

(A)

by striking 65 percent and inserting 80 percent, and

(B)

by striking subparagraphs (C) and (D).

(2)

Basic research payments

Section 41(b) of such Code is amended by redesignating paragraph (4) as paragraph (5) and by inserting after paragraph (3) the following new paragraph:

(4)

Basic research payments

(A)

In general

In the case of basic research payments by the taxpayer, paragraph (3)(A) shall be applied by substituting 100 percent for 80 percent.

(B)

Basic research payments defined

For purposes of this paragraph—

(i)

In general

The term basic research payment means, with respect to any taxable year, any amount paid in cash during such taxable year by a corporation to any qualified organization for basic research but only if—

(I)

such payment is pursuant to a written agreement between such corporation and such qualified organization, and

(II)

such basic research is to be performed by such qualified organization.

(ii)

Exception to requirement that research be performed by the organization

In the case of a qualified organization described in clause (iii) or (iv) of subparagraph (C), subclause (II) of clause (i) shall not apply.

(C)

Qualified organization

For purposes of this paragraph, the term qualified organization means any of the following organizations:

(i)

Educational institutions

Any educational organization which—

(I)

is an institution of higher education (within the meaning of section 3304(f)), and

(II)

is described in section 170(b)(1)(A)(ii).

(ii)

Certain scientific research organizations

Any organization not described in clause (i) which—

(I)

is described in section 501(c)(3) and is exempt from tax under section 501(a),

(II)

is organized and operated primarily to conduct scientific research, and

(III)

is not a private foundation.

(iii)

Scientific tax-exempt organizations

Any organization which—

(I)

is described in section 501(c)(3) (other than a private foundation) or section 501(c)(6),

(II)

is exempt from tax under section 501(a),

(III)

is organized and operated primarily to promote scientific research by qualified organizations described in clause (i) pursuant to written research agreements, and

(IV)

currently expends substantially all of its funds or substantially all of the basic research payments received by it for grants to, or contracts for basic research with, an organization described in clause (i).

(iv)

Certain grant organizations

Any organization not described in clause (ii) or (iii) which—

(I)

is described in section 501(c)(3) and is exempt from tax under section 501(a) (other than a private foundation),

(II)

is established and maintained by an organization established before July 10, 1981, which meets the requirements of subclause (I),

(III)

is organized and operated exclusively for the purpose of making grants to organizations described in clause (i) pursuant to written research agreements for purposes of basic research, and

(IV)

makes an election, revocable only with the consent of the Secretary, to be treated as a private foundation for purposes of this title (other than section 4940, relating to excise tax based on investment income).

(D)

Definitions and special rules

For purposes of this paragraph—

(i)

Basic research

The term basic research means any original investigation for the advancement of scientific knowledge not having a specific commercial objective, except that such term shall not include—

(I)

basic research conducted outside of the United States, and

(II)

basic research in the social sciences, arts, or humanities.

(ii)

Trade or business qualification

For purposes of applying paragraph (1) to this paragraph, any basic research payments shall be treated as an amount paid in carrying on a trade or business of the taxpayer in the taxable year in which it is paid (without regard to the provisions of paragraph (3)(B)).

(iii)

Certain corporations not eligible

The term corporation shall not include—

(I)

an S corporation,

(II)

a personal holding company (as defined in section 542), or

(III)

a service organization (as defined in section 414(m)(3)).

(3)

Conforming amendments

(A)

Section 41 of such Code is amended by striking subsection (e).

(B)

Section 41(f) of such Code is amended by striking paragraph (6).

(c)

Permanent Extension of Credit

(1)

In general

Section 41 of the Internal Revenue Code of 1986 is amended by striking subsection (h).

(2)

Conforming amendment

Paragraph (1) of section 45C(b) of such Code is amended by striking subparagraph (D).

(d)

Conforming Amendments

(1)

Section 41 of the Internal Revenue Code of 1986 is amended by redesignating subsections (d), (f), and (g) as subsections (c), (d), and (e), respectively.

(2)

Paragraphs (2)(A) and (5) (as redesignated by subsection (b)(2)) of section 41(b) of such Code are each amended by striking subsection (f)(1) and inserting subsection (d)(1).

(3)

Sections 45C(d)(3), 45G(e)(2), and 936(h)(5)(C)(i)(IV)(c) of such Code are each amended by striking section 41(f) and inserting section 41(d).

(4)

Section 54(l)(3)(A) of such Code is amended by striking section 41(g) and inserting section 41(e).

(5)

Section 170(e)(4)(B)(i) of such Code is amended by striking subparagraph (A) or subparagraph (B) of section 41(e)(6) and inserting clause (i) or (ii) of section 41(b)(4)(C).

(6)

Sections 197(f)(1)(C), 197(f)(9)(C)(i)(II), and 280C(b)(3) of such Code are each amended by striking section 41(f)(1) and inserting section 41(d)(1).

(7)

Section 280C(b)(3) of such Code is amended by striking section 41(f)(5) and inserting section 41(d)(5).

(8)

Section 280C(b)(3) of such Code is amended by striking section 41(f)(1)(B) and inserting section 41(d)(1)(B).

(9)

Section 280C(c)(1) of such Code is amended by striking section 41(e)(2) and inserting section 41(b)(4)(B).

(10)

Section 280C(c)(2)(A) of such Code is amended by striking section 41(a)(1) and inserting section 41(a).

(11)

Sections 936(j)(5)(D) and 965(c)(2)(C)(i) of such Code are each amended by striking section 41(f)(3) and inserting section 41(d)(3).

(e)

Effective Date

The amendments made by this section shall apply to taxable years beginning after December 31, 2007.

(f)

Study of Compliance With Substantiation Requirements

The Secretary of the Treasury or his delegate shall, not later than 1 year after the date of the enactment of this Act, conduct a study of taxpayer compliance with the substantiation requirements for claiming the credit allowed under section 41 of the Internal Revenue Code of 1986, including a study of—

(1)

whether taxpayers maintain adequate record keeping to determine eligibility for, and correct amount of, the credit,

(2)

the impact of failure to comply with such requirements on the oversight and enforcement responsibilities of the Internal Revenue Service, and

(3)

the burdens imposed on other taxpayers by failure to comply with such requirements.

The Secretary shall report the results of such study to the Committee on Ways and Means of the House of Representatives and the Committee on Finance of the Senate, including any recommendations for administrative or legislative actions which could be taken to improve compliance with such requirements.

Tax credit for investments in small technology innovation companies

(a)

In General

Subpart D of part IV of subchapter A of chapter 1 of the Internal Revenue Code of 1986 is amended by adding at the end the following new section:

45N.

Research investment tax credit

(a)

Allowance of Credit

(1)

In general

For purposes of section 38, in the case of a taxpayer who holds a qualified equity investment on a credit allowance date of such investment which occurs during the taxable year, the research investment tax credit determined under this section for such taxable year is an amount equal to the 5 percent of the amount paid to the qualified research entity for such investment at its original issue.

(2)

Credit allowance date

For purposes of paragraph (1), the term credit allowance date means, with respect to any qualified equity investment—

(A)

the date on which such investment is initially made, and

(B)

each of the 4 anniversary dates of such date thereafter.

(b)

Qualified Equity Investment

For purposes of this section—

(1)

In general

The term qualified equity investment means any equity investment in a qualified research entity if—

(A)

such investment is acquired by the taxpayer at its original issue (directly or through an underwriter) solely in exchange for cash,

(B)

substantially all of such cash is used by the qualified research entity to make qualified research investments, and

(C)

such investment is designated for purposes of this section by the qualified research entity.

Such term shall not include any equity investment issued by a qualified research entity more than 5 years after the date that such entity receives an allocation under subsection (e). Any allocation not used within such 5-year period may be reallocated by the Secretary under subsection (e).

(2)

Limitation

The maximum amount of equity investments issued by a qualified research entity which may be designated under paragraph (1)(C) by such entity shall not exceed the portion of the limitation amount allocated under subsection (f) to such entity.

(3)

Safe harbor for determining use of cash

The requirement of paragraph (1)(B) shall be treated as met if at least 85 percent of the aggregate gross assets of the qualified research entity are invested in qualified research investments.

(4)

Treatment of subsequent purchasers

The term qualified research investment includes any equity investment which would (but for paragraph (1)(A)) be a qualified equity investment in the hands of the taxpayer if such investment was a qualified equity investment in the hands of a prior holder.

(5)

Redemptions

A rule similar to the rule of section 1202(c)(3) shall apply for purposes of this subsection.

(6)

Equity investment

The term equity investment means—

(A)

any stock (other than nonqualified preferred stock as defined in section 351(g)(2)) in an entity which is a corporation, and

(B)

any capital interest in an entity which is a partnership.

(c)

Qualified Research Entity

For purposes of this section, the term qualified research entity means any domestic corporation or partnership if—

(1)

the primary mission of the entity is serving, or providing investment capital for, qualifying small business innovation companies,

(2)

the entity maintains accountability to engineers, scientists, and other research-related professionals through their representation on any governing board of the entity or on any advisory board to the entity, and

(3)

the entity is certified by the Secretary for purposes of this section as being a qualified research entity.

(d)

Qualified Research Investments

For purposes of this section—

(1)

In general

The term qualified research investment means—

(A)

any capital or equity investment in, or loan to, any qualifying small business innovation company, which when added to any other such investment in or loan to such company taken into account for purposes of this section for any taxable year does not exceed $10,000,000, and

(B)

the purchase from another qualified research entity of any loan made by such entity which is a qualified research investment.

(2)

Qualifying small business innovation company

(A)

In general

For purposes of paragraph (1), the term qualifying small business innovation company means, with respect to any taxable year, any corporation (including a nonprofit corporation) or partnership if for such year—

(i)

the gross receipts of such entity do not exceed $10,000,000,

(ii)

the aggregate gross assets of such entity do not exceed $25,000,000, and

(iii)

at least 50 percent of the gross expenditures of such entity would qualify as research or experimental expenditures under section 174.

All persons treated as a single employer under subsection (a) or (b) of section 52 or subsection (m) or (o) of section 414 shall be treated as one person for purposes of this subparagraph.

(B)

Aggregate gross assets

For purposes of subparagraph (A)(ii), the term aggregate gross assets shall have meaning given such term by section 1202(d)(2), except such term shall not include intangibles and goodwill.

(e)

National Limitation on Amount of Investments Designated

(1)

In general

There is a research investment tax credit limitation for each calendar year. Such limitation is—

(A)

$500,000,000 for 2007,

(B)

$750,000,000 for 2008 and 2009, and

(C)

$1,000,000,000 for 2010 and 2011.

(2)

Allocation of limitation

The limitation under paragraph (1) shall be allocated by the Secretary among qualified research entities selected by the Secretary, with not more than $25,000,000 allocated to any 1 qualified research entity in any calendar year. In making allocations under the preceding sentence, the Secretary shall give priority to any entity—

(A)

with a record of having successfully provided capital or technical assistance to qualifying small business innovation companies, or

(B)

which intends to satisfy the requirement under subsection (b)(1)(B) by making qualified research investments in 1 or more companies in which persons unrelated to such entity (within the meaning of section 267(b) or 707(b)(1)) hold the majority equity interest, and

if more than 1 qualified research entity meets subparagraph (A) or (B), the Secretary shall give priority to the entity with the earliest investment. If insufficient allocations are available for all qualified applicants in any calendar year, the priorities established for such applicants without allocations shall be carried over to the succeeding calendar year.

(3)

Carryover of unused limitation

If the research investment tax credit limitation for any calendar year exceeds the aggregate amount allocated under paragraph (2) for such year, such limitation for the succeeding calendar year shall be increased by the amount of such excess. No amount may be carried under the preceding sentence to any calendar year after 2018.

(f)

Recapture of Credit in Certain Cases

(1)

In general

If, at any time during the 7-year period beginning on the date of the original issue of a qualified equity investment in a qualified research entity, there is a recapture event with respect to such investment, then the tax imposed by this chapter for the taxable year in which such event occurs shall be increased by the credit recapture amount.

(2)

Credit recapture amount

For purposes of paragraph (1), the credit recapture amount is an amount equal to the sum of—

(A)

the aggregate decrease in the credits allowed to the taxpayer under section 38 for all prior taxable years which would have resulted if no credit had been determined under this section with respect to such investment, plus

(B)

interest at the underpayment rate established under section 6621 on the amount determined under subparagraph (A) for each prior taxable year for the period beginning on the due date for filing the return for the prior taxable year involved.

No deduction shall be allowed under this chapter for interest described in subparagraph (B).

(3)

Recapture event

For purposes of paragraph (1), there is a recapture event with respect to an equity investment in a qualified research entity if—

(A)

such entity ceases to be a qualified research entity,

(B)

the proceeds of the investment cease to be used as required of subsection (b)(1)(B), or

(C)

such investment is redeemed by such entity.

(4)

Special rules

(A)

Tax benefit rule

The tax for the taxable year shall be increased under paragraph (1) only with respect to credits allowed by reason of this section which were used to reduce tax liability. In the case of credits not so used to reduce tax liability, the carryforwards and carrybacks under section 39 shall be appropriately adjusted.

(B)

No credits against tax

Any increase in tax under this subsection shall not be treated as a tax imposed by this chapter for purposes of determining the amount of any credit under this chapter or for purposes of section 55.

(g)

Regulations

The Secretary shall prescribe such regulations as may be appropriate to carry out this section, including regulations—

(1)

which prevent the abuse of the purposes of this section,

(2)

which provide rules for determining whether the requirement of subsection (b)(1)(B) is treated as met,

(3)

which impose appropriate reporting requirements, and

(4)

which apply the provisions of this section to newly formed entities.

(b)

Credit Treated as Business Credit

Section 38(b) of the Internal Revenue Code of 1986 (relating to current year business credit) is amended by striking and at the end of paragraph (29), by striking the period at the end of paragraph (30) and inserting , plus, and by adding at the end the following new paragraph:

(31)

the credit determined under section 45N(a).

(c)

Conforming Amendment

The table of sections for subpart D of part IV of subchapter A of chapter 1 of the Internal Revenue Code of 1986 is amended by adding at the end the following new item:

Sec. 45N. Research investment tax credit.

(d)

Effective Date

The amendments made by this section shall apply to investments made after December 31, 2006.

Tax-exempt financing of research park facilities

(a)

In General

Subsection (a) of section 142 is amended—

(1)

by striking or at the end of paragraph (14),

(2)

by striking the period at the end of paragraph (15) and inserting , or, and

(3)

by inserting at the end the following new paragraph:

(16)

research park facility.

(b)

Definition

Section 142 is amended by inserting at the end the following new subsection:

(n)

Research Park Facility

For purposes of subsection (a)(16), the term research park facility means a facility (including buildings, land, or other structures) which is used in connection with research and experimentation (as defined in section 168(i)(11)). For purposes of the preceding sentence, such term includes facilities which are directly related and ancillary to a research park facility (determined without regard to this sentence) if—

(1)

such facilities are located on the same site as the research park facility, and

(2)

not more than 25 percent of the net proceeds of the issue are used to provide such facilities.

(c)

Effective Date

The amendments made by this section shall apply with respect to bonds issued on or after the date of the enactment of this Act.

Clarification of application of private activity bond rules with respect to funding of Federal research agreements

Not later than June 30, 2007, the Secretary of the Treasury shall prescribe guidance identifying the circumstances, if any, in which the rights of the Federal Government granted under chapter 18 of title 35, United States Code (commonly known as the Bayh-Dole Act (Pub. Law No. 96–517)) constitute private business use under the private activity bond rules in section 141 of the Internal Revenue Code of 1986.

Research and Development Tax Credit Act of 2007

Legislative Activity

Floor Debate

Bill Text