Senate Tax Bill’s AMT Treatment May Impact Tech R&D

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By Michaela Ross and Alexis Kramer

Tech companies have much to cheer for in the Republican tax overhaul bills, but a late change to the Senate-passed measure is causing them headaches.

Senate GOP lawmakers changed their measure to preserve the alternative minimum tax (AMT), a move that could undermine the ability of some tech companies to claim any research and development tax credit if they are forced to file under the AMT structure, tax attorneys and tech groups told Bloomberg Law.

“These provisions on R&D are not good for the tech sector as a whole or for innovation,” Robert J. Kovacev, a tax attorney and partner at Steptoe & Johnson LLP in Washington, told Bloomberg Law.

Maintaining or increasing tax credits for research and development has been a top priority for tech trade groups and think tanks. The industry has argued that a generous R&D tax credit makes the U.S. more competitive in the global innovation race. But the tussle over the AMT and its effect on tax credits could dampen the industry’s otherwise consistent support for the proposed changes to the nation’s tax system.

The U.S. was the most generous country in granting research tax incentives in the late 1980s, but fell to the 25th slot in 2016, according a study by the Information Technology and Innovation Foundation (ITIF), using data from the Organization for Economic Cooperation and Development.

Currently companies must file taxes under both the regular corporate rate and the AMT and pay whichever rate is higher. The AMT is a 20 percent corporate tax designed to prevent companies from taking too many tax breaks. Senate Republicans had planned to repeal the AMT in their bill but added it back in late Dec. 1.

Preserving the AMT could stymie companies’ ability to claim an R&D tax credit. Companies would lose the benefit of R&D because they would be required to add the credit back into the tax base to calculate the AMT, Lisa Zarlenga, a tax attorney and partner at Steptoe & Johnson in Washington, told Bloomberg Law Dec. 4.

Zarlenga said that tech companies may not have immediately realized the impact the bill would have on the R&D credit because of the last minute add-in to preserve the AMT.

“It’s a little bit hidden,” Zarlenga said. “Tech companies are realizing it as we speak.”

Tech companies were already looking at possibly higher taxes due to provisions that would curtail their ability to file deductions, according to attorneys and trade groups.

Both the House and Senate measures would eliminate up-front deductions for research and development expenses, including software development expenses. Tech companies would need to wait five years to realize the full tax credit for innovation research initiatives under that language.

Changes Ahead

The bill could still be changed to appease tech interests as House and Senate Republicans work to finalize compromise language on the legislation. The House Nov. 16 passed its version of tax legislation ( H.R. 1) that repealed the AMT.

Joe Kennedy, senior fellow for economic policy at the ITIF, told Bloomberg Law he expected the conference committee to address the question, pointing to bipartisan support in 2015 that made the R&D tax credits permanent. But the pressure to finalize negotiations and the tight margins of GOP support for the bill might jeopardize the credits, he said.

Still, the easiest way to remedy the issue would be to exclude R&D tax credits from the AMT calculation, Kennedy said.

“When you’re operating with such small margins and only support from one party, it can be very difficult to guess what will get it across the finish line,” Kennedy said.

To contact the reporter on this story: Michaela Ross in Washington at mross@bloomberglaw.com; Alexis Kramer in Washington at akramer@bloomberglaw.com

To contact the editor responsible for this story: Keith Perine at kperine@bloomberglaw.com

For More Information

House tax bill is available at: http://src.bna.com/uGk.

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