Simplification of research and development credit

(a)

Transition to fully implemented simplified credit for qualified research expanses

(1)

Phase-out of traditional credit

Section 41(a) of the Internal Revenue Code of 1986 is amended— (A)by striking 20 percent each place it appears and inserting the applicable percentage, and (B)by adding at the end the following new flush sentence:

For purposes of this subsection, the term applicable percentage means 20 percent with respect to taxable years beginning in 2008 and 2009.

(2)

Phase-in of simplified credit

Section 41(c)(5)(A) of such Code is amended— (A)by striking 12 percent and inserting the applicable percentage, and (B)by adding at the end the following new sentence: For purposes of the preceding sentence, the term applicable percentage means 16 percent with respect to taxable years beginning in 2008 and 18 percent with respect to taxable years beginning in 2009.. (3)

Effective date

The amendments made by this subsection shall apply to taxable years beginning after December 31, 2007. (b)

Fully implemented simplified credit for qualified research expenses

(1)

In general

Subsection (a) of section 41 of the Internal Revenue Code of 1986 (relating to credit for increasing research activities) is amended to read as follows:

(a)

Determination of credit

(1)

In general

For purposes of section 38, the research credit determined under this section for the taxable year shall be equal to 20 percent of so much of the qualified research expenses for such taxable year as exceeds 50 percent of the average qualified research expenses for the 3 taxable years preceding the taxable year for which the credit is being determined. (2)

Special rule in case of no qualified research expenses in any of 3 preceding taxable years

(A)

Taxpayers to which paragraph applies

The credit under this section shall be determined under this paragraph if the taxpayer has no qualified research expenses in at least 1 of the 3 taxable years preceding the taxable year for which the credit is being determined. (B)

Credit rate

The credit determined under this paragraph shall be equal to 10 percent of the qualified research expenses for the taxable year.

(2)

Conforming amendment

Section 41 of such Code is amended by striking subsection (c). (c)

Uniform reimbursement rates for all contract research expenses other than amounts paid for basic research

(1)

In general

Section 41(b)(3) of the Internal Revenue Code of 1986 (relating to contract research expenses) is amended— (A)by striking 65 percent and inserting 80 percent, and (B)by striking subparagraphs (C) and (D). (2)

Basic research payments

Section 41(b) of such Code is amended by redesignating paragraph (4) as paragraph (5) and by inserting after paragraph (3) the following new paragraph:

(4)

Basic research payments

(A)

In general

In the case of basic research payments by the taxpayer, paragraph (3)(A) shall be applied by substituting 100 percent for 80 percent. (B)

Basic research payments defined

For purposes of this paragraph— (i)

In general

The term basic research payment means, with respect to any taxable year, any amount paid in cash during such taxable year by a corporation to any qualified organization for basic research but only if— (I)such payment is pursuant to a written agreement between such corporation and such qualified organization, and (II)such basic research is to be performed by such qualified organization. (ii)

Exception to requirement that research be performed by the organization

In the case of a qualified organization described in clause (iii) or (iv) of subparagraph (C), subclause (II) of clause (i) shall not apply. (C)

Qualified organization

For purposes of this paragraph, the term qualified organization means any of the following organizations: (i)

Educational institutions

Any educational organization which— (I)is an institution of higher education (within the meaning of section 3304(f)), and (II)is described in section 170(b)(1)(A)(ii). (ii)

Certain scientific research organizations

Any organization not described in clause (i) which— (I)is described in section 501(c)(3) and is exempt from tax under section 501(a), (II)is organized and operated primarily to conduct scientific research, and (III)is not a private foundation. (iii)

Scientific tax-exempt organizations

Any organization which— (I)is described in section 501(c)(3) (other than a private foundation) or section 501(c)(6), (II)is exempt from tax under section 501(a), (III)is organized and operated primarily to promote scientific research by qualified organizations described in clause (i) pursuant to written research agreements, and (IV)currently expends substantially all of its funds or substantially all of the basic research payments received by it for grants to, or contracts for basic research with, an organization described in clause (i). (iv)

Certain grant organizations

Any organization not described in clause (ii) or (iii) which— (I)is described in section 501(c)(3) and is exempt from tax under section 501(a) (other than a private foundation), (II)is established and maintained by an organization established before July 10, 1981, which meets the requirements of subclause (I), (III)is organized and operated exclusively for the purpose of making grants to organizations described in clause (i) pursuant to written research agreements for purposes of basic research, and (IV)makes an election, revocable only with the consent of the Secretary, to be treated as a private foundation for purposes of this title (other than section 4940, relating to excise tax based on investment income). (D)

Definitions and special rules

For purposes of this paragraph— (i)

Basic research

The term basic research means any original investigation for the advancement of scientific knowledge not having a specific commercial objective, except that such term shall not include— (I)basic research conducted outside of the United States, and (II)basic research in the social sciences, arts, or humanities. (ii)

Trade or business qualification

For purposes of applying paragraph (1) to this paragraph, any basic research payments shall be treated as an amount paid in carrying on a trade or business of the taxpayer in the taxable year in which it is paid (without regard to the provisions of paragraph (3)(B)). (iii)

Certain corporations not eligible

The term corporation shall not include— (I)an S corporation, (II)a personal holding company (as defined in section 542), or (III)a service organization (as defined in section 414(m)(3)).

(3)

Conforming amendments

(A)Section 41 of such Code is amended by striking subsection (e). (B)Section 41(f) of such Code is amended by striking paragraph (6). (d)

5-year extension of credit

(1)

In general

Section 41(h)(1)(B) of the Internal Revenue Code of 1986 is amended by striking December 31, 2007 and inserting December 31, 2012. (2)

Conforming amendment

Section 45C(b)(1)(D) of such Code is amended by striking December 31, 2007 and inserting December 31, 2012. (3)

Effective date

The amendments made by this subsection shall apply to taxable years beginning after December 31, 2007. (e)

Conforming amendments

(1)Section 41 of the Internal Revenue Code of 1986 is amended by redesignating subsections (d), (f), and (g) as subsections (c), (d), and (e), respectively. (2)Paragraphs (2)(A) and (5) (as redesignated by subsection (b)(2)) of section 41(b) of such Code are each amended by striking subsection (f)(1) and inserting subsection (d)(1). (3)Sections 45C(d)(3), 45G(e)(2), and 936(h)(5)(C)(i)(IV)(c) of such Code are each amended by striking section 41(f) and inserting section 41(d). (4)Section 54(l)(3)(A) of such Code is amended by striking section 41(g) and inserting section 41(e). (5)Section 170(e)(4)(B)(i) of such Code is amended by striking subparagraph (A) or subparagraph (B) of section 41(e)(6) and inserting clause (i) or (ii) of section 41(b)(4)(C). (6)Sections 197(f)(1)(C), 197(f)(9)(C)(i)(II), and 280C(b)(3) of such Code are each amended by striking section 41(f)(1) and inserting section 41(d)(1). (7)Section 280C(b)(3) of such Code is amended by striking section 41(f)(5) and inserting section 41(d)(5). (8)Section 280C(b)(3) of such Code is amended by striking section 41(f)(1)(B) and inserting section 41(d)(1)(B). (9)Section 280C(c)(1) of such Code is amended by striking section 41(e)(2) and inserting section 41(b)(4)(B). (10)Section 280C(c)(2)(A) of such Code is amended by striking section 41(a)(1) and inserting section 41(a). (11)Sections 936(j)(5)(D) and 965(c)(2)(C)(i) of such Code are each amended by striking section 41(f)(3) and inserting section 41(d)(3). (f)

Effective date

Except as otherwise provided in this section, the amendments made by this section shall apply to taxable years beginning after December 31, 2009. (g)

Study of compliance with substantiation requirements

The Secretary of the Treasury or his delegate shall, not later than 1 year after the date of the enactment of this Act, conduct a study of taxpayer compliance with the substantiation requirements for claiming the credit allowed under section 41 of the Internal Revenue Code of 1986, including a study of— (1)whether taxpayers maintain adequate record keeping to determine eligibility for, and correct amount of, the credit, (2)the impact of failure to comply with such requirements on the oversight and enforcement responsibilities of the Internal Revenue Service, and (3)the burdens imposed on other taxpayers by failure to comply with such requirements.

The Secretary shall report the results of such study to the Committee on Ways and Means of the House of Representatives and the Committee on Finance of the Senate, including any recommendations for administrative or legislative actions which could be taken to improve compliance with such requirements.