Planning in the Face of Tax-Credit Uncertainty

Planning in the Face of Tax-Credit Uncertainty

Congress is awhirl in the all-too-familiar cycle for a number of tax provisions: enactment, expiration, and extension.

More than 50 corporate and individual tax provisions, including the popular research credit, are not a permanent part of the Internal Revenue Code. Instead, these temporary provisions typically expire every year or two and are usually given new life as part of legislative packages known as “tax extenders.”

Fiscal policy aside, businesses universally support tax extenders because of the valuable incentives they bring to the economy. However, the temporary nature of the provisions can create challenges for companies, which must determine how to manage tax incentive programs that are not certain to continue. Here are some considerations as the legislative process unfolds, as well as some practical insights for planning in the interim.

We’ve Seen This Movie Before

The research credit and other provisions included in an extenders package are typically extended as a group, expediting a process that would be even more protracted if each individual provision required a separate vote. Due to the current federal deficit, the extenders endure an increasingly contentious approval process in Congress before they are finally signed into law by the president, thus causing uncertainty for business tax professionals.

The research credit has been renewed and extended by Congress nearly 20 times since its inception in 1981. Since tax extenders are laws that will expire after a certain date, the Congressional Budget Office must assume that these laws are temporary, which results in a distortion of the true budget picture — specifically, a projection of a healthier budget balance than is likely to occur. Read more on CFO.