Tech Advocates Seek Undying RD Credit –

WASHINGTON, D.C. – Although the federal government’s research-and-development tax credit has not greatly benefited venture capitalists or their young portfolio companies, Congress’s attempt to make R&D write-offs permanent might eventually prove advantageous.

Mark Heesen, the National Venture Capital Association’s director of legislative, regulatory and entrepreneurial affairs, noted that the current tax credit structure does not favor companies that operate at a loss – and those businesses include many young VC-backed companies, especially those in biotechnology.

Created in 1981, the tax credit has been renewed for extensions nine times, and the current version expires June 30. This year, however, several dozen members of the House of Representatives have proposed making the R&D tax deduction permanent.

Mr. Heesen said a permanent R&D tax credit – or even a long-term extension – could lead to restructuring of the credit so it benefits companies enduring a financial loss. For example, a revision could allow unprofitable companies to carry over their credits until they are profitable so they could later benefit from the R&D write-off.

“If this is the first step of a process, then we’re fine with that,” Mr. Heesen said, referring to the proposal to make the credit permanent.

The R&D tax credit is unrelated to the research and development accounting write-offs currently under scrutiny by several regulatory agencies. Those tax credits are triggered when a corporation buys another company involved in research (VCJ, March, page 5).

The issue of R&D deductions are a priority for the Technology Network (TechNet), a Silicon Valley lobbying group for high-tech companies. Overall, the group’s VC members, about 30% of TechNet’s leadership, support extending the tax credit, in part because they know that a healthy high-tech industry will help fledgling venture-backed companies, TechNet Vice President Mike Engelhardt explained.

In general, the idea of the tax credit is popular, but making it permanent means Congress must compensate for the lost tax revenue. Making up for the lost capital is difficult, which is why getting the credit approved for extended periods or permanently has been an uphill battle, Mr. Engelhardt said.

Silicon Valley Rep. Anna Eshoo (D-Calif.) is among those who believe the credit should be made permanent so companies can count on it when making their research plans. Rep. Eshoo and other supporters in late February introduced a bill in the House, H.R. 835, to make the credit permanent.

Rep. Eshoo’s spokesperson said passage of the bill in this session of Congress was likely, noting that Minority Leader Dick Gephardt (D-Mo.) and Ways and Means Committee ranking member Charlie Rangel (D-N.Y.) support the legislation. The bill has been referred to the Ways and Means Committee and hearings are expected to be arranged soon, the spokesman said.