A Permanent R&D Tax Credit Is a Great Idea. We Can Do More.

A bill proposed by Rep. Kevin Brady (R-TX) is designed to provide a permanent R&D tax credit. The American Research and Competitiveness Act of 2011 has drawn immediate support from bipartisan representatives in California, Texas, and Minnesota, as well as industry associations AdvaMed and the Medical Device Manufacturer’s Association (MDMA).

Heather Thompson

March 28, 2011

3 Min Read
A Permanent R&D Tax Credit Is a Great Idea. We Can Do More.

The tax credit would be extended to any manufacturers investing in research and development. “All medical device companies that sell product in the U.S. market would benefit from a consistent tax policy coming out of Washington,” notes Jeff Kimbell, president of Jeffrey J. Kimbell and Associates.

Similar R&D tax credits have been around fairly consistently (there have been 14 extensions in the last 30 years) and they almost always get extended, so a permanent one would be nice, if only to take away the small degree of uncertainty. “It would allow companies to properly plan investment for years ahead versus a [on a] year-to-year basis,” Kimbell says.

It is more important, however, to make the tax credits more robust. The Brady bill aims to increase R&D credit from 14 to 20%. “That’s a good start,” says Dean Zerbe, national managing director for alliantgroup LP, a tax services firm based in Houston. But Congress needs to take it a step further, he says. “Right now, we only rank 17th among 25 countries that offer a national or federal R&D credit.”

To make the bill more robust, Zerbe recommends adding refundability. “All the tax credits in the world don’t make a difference if they don’t help the companies that really need it,” he says. Making the tax credit refundable will open it up to small- and medium-sized companies that spend a significant amount on R&D but might not yet show a profit. Medical devices take several years of R&D to get on the market. For a company just starting out, that is a huge investment. “What good is $100,000 worth of credit on paper if a company is not able to use it?” asks David Ji, a managing director from alliantgroup.

Zerbe believes that it is vital to increase access to the tax credit and educate medical device firms on what parts of their processes are eligible. “States offering tax credits have been very generous and they often include a refund program for start-ups,” says Zerbe, pointing to the plans offered by Louisiana, Minnesota, and New York. Ji also points out that Canada has a permanent tax credit that includes a refund system. “In Canada, for every dollar spent, a company could see 60 cents back. In the United States, a company may only see 6 cents back.”

In addition, many companies only think of R&D in a traditional sense, says Ji. “It’s important to look at the development side of R&D,” he says. “Practical applications such as prototyping, testing, validation are also considered under the tax credit.” For example, Ji says that contract manufacturers often don’t think that they qualify because they don’t come up with the design. “They are responsible for developing the manufacturing processes and that makes them eligible.”

Zerbe estimates that the tax credit could help companies see between $8 billion and $9 billion per year for businesses, but he thinks that the Brady bill is just a start, even if Congress adds refundablity to it. “I was hoping after the State of the Union that a comprehensive competitiveness bill would be the next step.”

Kimbell agrees that more can be done. “My suggestion to the Obama administration would be to hire a life science entrepreneur or a seasoned veteran of [the medical device] space onto the senior staff at the National Economic Council or the Office of Domestic Policy.”

Making sure industry has a seat at the table is the next step to ensuring that the tax credit makes sense and that it is broad enough to be applicable to small and medium-sized businesses. Zerbe says that “too many businesses tune out when they hear R&D tax credit. But it’s the biggest tax credit out there.”

The medical device community can make a difference in getting the permanent tax credit passed. Your association and Congress members should be receiving your call. 


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