Passage of Senate Tax Bill Puts R&D Tax Credit in Doubt -- Update

By Richard Rubin Features Dow Jones Newswires

Senate Republicans, in their final push last week to pass a sweeping tax bill, may have undermined a research-and-development tax credit many companies count on to encourage innovation.

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Late Friday, just hours before the Senate voted 51-49 to pass the bill, which included about $1.4 trillion in tax cuts, Republicans decided to preserve the corporate alternative minimum tax instead of repealing it as planned. The change helped them provide money for other priorities lawmakers demanded to include in the legislation.

Some experts say the change will have unintended consequences, forcing many companies to lose tax breaks the bill's authors intended to protect. The decision sparked a furious effort among American corporations over the weekend to understand and reverse the change.

"Everyone, very quickly, is worried," said Eric Solomon, co-director of the national tax office at EY LLP, whose firm was fielding queries from confused and baffled clients on Saturday. "People were surprised, and they're trying to figure out what it means for them."

The alternative minimum tax is a parallel tax system with low rates and few tax breaks. Under the present system, the corporate alternative minimum of 20% is rarely applicable to business filers, who end up paying a higher 35% tax rate and can have lower effective rates by claiming breaks that aren't affected by the AMT.

But the corporate rate is now proposed to be 20%, so the overhaul could drive many companies into the AMT -- and force them to lose some of their breaks in the process.

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The biggest consequence could be the research credit, often used by manufacturers, technology firms and pharmaceutical companies. Under the credit, companies get money back from the government for what they spend on innovation, often for wages of scientists and engineers. Corporations will claim $10.3 billion in credits in 2018, according to the congressional Joint Committee on Taxation.

"Research and development is the lifeblood of manufacturing," said Chris Netram, vice president for tax and domestic economic policy at the National Association of Manufacturers. "The NAM supports pro-growth tax reform, and is working with key policymakers to ensure the final bill does not inadvertently harm manufacturing."

Republicans had promised to protect the credit as an incentive for high-paying jobs. Other breaks could also be undermined, including allowances used by energy companies worth about $1 billion a year.

"Mistakes like this one happen when senators cut their deals 24 hours before the bill passes," said Russ Sullivan, a former Democratic staff director at the Senate Finance Committee now at McGuireWoods LLP. "The legislative sausage grinder needs to churn more than one day to get all the bones out."

Murray Energy Corp., an Ohio-based firm and the largest privately held U.S. coal-mining company, complained that the AMT decision and the Senate's tougher limits on interest deductions made a "mockery out of so-called tax reform."

Robert Murray, the company's chief executive officer, said the Senate tax plan would raise his tax bill by $60 million.

"What the Senate did, in their befuddled mess, is drove me out of business and then bragged about the fact that they got some tax reform passed," Mr. Murray said Sunday. "This is not job creation. This is not stimulating income. This is driving a whole sector of our community into nonexistence."

Mr. Murray is a donor to Republicans, including President Donald Trump, who talked during his 2016 campaign about boosting coal-mining jobs.

The Joint Committee on Taxation estimates keeping the corporate AMT will raise $40 billion over a decade, much smaller than the value of incentives like the research and development credit. That suggests the provision won't have the catastrophic effect tax experts and companies fear, said an aide familiar with the decision to add the AMT provision.

Some tax analysts say that $40 billion estimate is too small and the decision to keep the corporate AMT will have far-reaching effects. Policy makers are aware of companies' concerns and discussions are fluid, the aide said.

The tax bill that passed the House last month would eliminate the corporate AMT. Republicans plan to reconcile the differences in the bills in a conference committee and get a final measure to Mr. Trump by Christmas. House leaders already say they won't just pass the Senate bill, and complications like the corporate AMT make that even more likely.

"Luckily, this is not the final bill," said Reuven Avi-Yonah, a tax law professor at the University of Michigan who expects Republicans to fix the problem in a House-Senate conference committee.

The AMT is designed to make sure companies and individuals can't use legal breaks to avoid all their taxes. Under the AMT, taxpayers are required to calculate what they owe under both tax systems and pay whichever is greater. For individuals, state taxes and personal exemptions can't be deducted. The tax tends to affect upper-middle-class residents of high-tax states.

The Senate kept both the individual and the corporate AMT. The list of disallowed breaks under the corporate AMT is even more complicated than it is for individuals.

Most corporations don't worry about the AMT. With a regular tax rate of 35% and a corporate AMT rate of 20%, almost all of them end up in the regular tax system. The corporate AMT doesn't claw back all tax breaks in the current system, including most of the benefits of earning profits in low-tax foreign countries.

The original Senate Republican plan set the regular corporate tax rate to 20% and repealed the corporate AMT. The last-minute amendment reinstated the corporate AMT and its 20% rate.

Because the AMT forces filers to pay the higher of two the tax calculations, many companies would be forced into the AMT system with a regular rate and AMT rate both set at 20%.

"It's really strange, of course," Mr. Avi-Yonah said. "The whole idea of the AMT in all the years it's been around since 1969 has been broader base, lower rates. Whereas this is broader base, same rate."

Write to Richard Rubin at richard.rubin@wsj.com

(END) Dow Jones Newswires

December 03, 2017 16:38 ET (21:38 GMT)