[House Report 114-113]
[From the U.S. Government Publishing Office]


114th Congress     }                                {     Report
                        HOUSE OF REPRESENTATIVES
 1st Session       }                                {     114-113
====================================================================
 
        AMERICAN RESEARCH AND COMPETITIVENESS ACT OF 2015

                                _______
                                

  May 14, 2015.--Committed to the Committee of the Whole House on the 
              State of the Union and ordered to be printed

                                _______
                                

Mr. Ryan of Wisconsin, from the Committee on Ways and Means, submitted 
                             the following

                              R E P O R T

                             together with

                            DISSENTING VIEWS

                        [To accompany H.R. 880]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on Ways and Means, to whom was referred the 
bill (H.R. 880) to amend the Internal Revenue Code of 1986 to 
simplify and make permanent the research credit, having 
considered the same, report favorably thereon with an amendment 
and recommend that the bill as amended do pass.

                                CONTENTS

                                                                   Page
  I.  SUMMARY AND BACKGROUND..........................................3
          A. Purpose and Summary.................................     3
          B. Background and Need for Legislation.................     4
          C. Legislative History.................................     4
 II.  EXPLANATION OF THE BILL.........................................5
          A. Research Credit Simplified and Made Permanent (sec. 
              41 of the Code)....................................     5
III.  VOTES OF THE COMMITTEE..........................................9
 IV.  BUDGET EFFECTS OF THE BILL.....................................10
          A. Committee Estimate of Budgetary Effects.............    10
          B. Statement Regarding New Budget Authority and Tax 
              Expenditures Budget Authority......................    12
          C. Cost Estimate Prepared by the Congressional Budget 
              Office.............................................    12
  V.  OTHER MATTERS TO BE DISCUSSED UNDER THE RULES OF THE HOUSE.....15
          A. Committee Oversight Findings and Recommendations....    15
          B. Statement of General Performance Goals and 
              Objectives.........................................    15
          C. Information Relating to Unfunded Mandates...........    15
          D. Applicability of House Rule XXI 5(b)................    15
          E. Tax Complexity Analysis.............................    15
          F. Congressional Earmarks, Limited Tax Benefits, and 
              Limited Tariff Benefits............................    16
          G. Duplication of Federal Programs.....................    16
          H. Disclosure of Directed Rule Makings.................    16
 VI.  CHANGES IN EXISTING LAW PROPOSED BY THE BILL, AS REPORTED......16
          A. Text of Existing Law Amended or Repealed by the 
              Bill, as Reported..................................    16
          B. Changes in Existing Law Proposed by the Bill, as 
              Reported...........................................    41
VII.  DISSENTING VIEWS...............................................68

    The amendment is as follows:
  Strike all after the enacting clause and insert the 
following:

SECTION 1. SHORT TITLE.

  This Act may be cited as the ``American Research and Competitiveness 
Act of 2015''.

SEC. 2. RESEARCH CREDIT SIMPLIFIED AND MADE PERMANENT.

  (a) In General.--Section 41(a) of the Internal Revenue Code of 1986 
is amended to read as follows:
  ``(a) In General.--For purposes of section 38, the research credit 
determined under this section for the taxable year shall be an amount 
equal to the sum of--
          ``(1) 20 percent of so much of the qualified research 
        expenses for the 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) 20 percent of so much of the basic research payments 
        for the taxable year as exceeds 50 percent of the average basic 
        research payments for the 3 taxable years preceding the taxable 
        year for which the credit is being determined, plus
          ``(3) 20 percent of the amounts paid or incurred by the 
        taxpayer in carrying on any trade or business of the taxpayer 
        during the taxable year (including as contributions) to an 
        energy research consortium for energy research.''.
  (b) Repeal of Termination.--Section 41 of such Code is amended by 
striking subsection (h).
  (c) Credit Allowed Against Alternative Minimum Tax in Case of 
Eligible Small Business.--Section 38(c)(4)(B) of such Code is amended 
by redesignating clauses (ii) through (ix) as clauses (iii) through 
(x), respectively, and by inserting after clause (i) the following new 
clause:
                          ``(ii) the credit determined under section 41 
                        for the taxable year with respect to an 
                        eligible small business (as defined in 
                        paragraph (5)(C), after application of rules 
                        similar to the rules of paragraph (5)(D)),''.
  (d) Conforming Amendments.--
          (1) Section 41(c) of such Code is amended to read as follows:
  ``(c) Determination of Average Research Expenses for Prior Years.--
          ``(1) Special rule in case of no qualified research 
        expenditures in any of 3 preceding taxable years.--In any case 
        in which the taxpayer has no qualified research expenses in any 
        one of the 3 taxable years preceding the taxable year for which 
        the credit is being determined, the amount determined under 
        subsection (a)(1) for such taxable year shall be equal to 10 
        percent of the qualified research expenses for the taxable 
        year.
          ``(2) Consistent treatment of expenses.--
                  ``(A) In general.--Notwithstanding whether the period 
                for filing a claim for credit or refund has expired for 
                any taxable year taken into account in determining the 
                average qualified research expenses, or average basic 
                research payments, taken into account under subsection 
                (a), the qualified research expenses and basic research 
                payments taken into account in determining such 
                averages shall be determined on a basis consistent with 
                the determination of qualified research expenses and 
                basic research payments, respectively, for the credit 
                year.
                  ``(B) Prevention of distortions.--The Secretary may 
                prescribe regulations to prevent distortions in 
                calculating a taxpayer's qualified research expenses or 
                basic research payments caused by a change in 
                accounting methods used by such taxpayer between the 
                current year and a year taken into account in 
                determining the average qualified research expenses or 
                average basic research payments taken into account 
                under subsection (a).''.
          (2) Section 41(e) of such Code is amended--
                  (A) by striking all that precedes paragraph (6) and 
                inserting the following:
  ``(e) Basic Research Payments.--For purposes of this section--
          ``(1) 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--
                  ``(A) such payment is pursuant to a written agreement 
                between such corporation and such qualified 
                organization, and
                  ``(B) such basic research is to be performed by such 
                qualified organization.
          ``(2) Exception to requirement that research be performed by 
        the organization.--In the case of a qualified organization 
        described in subparagraph (C) or (D) of paragraph (3), 
        subparagraph (B) of paragraph (1) shall not apply.'',
                  (B) by redesignating paragraphs (6) and (7) as 
                paragraphs (3) and (4), respectively, and
                  (C) in paragraph (4), as so redesignated, by striking 
                subparagraphs (B) and (C) and by redesignating 
                subparagraphs (D) and (E) as subparagraphs (B) and (C), 
                respectively.
          (3) Section 41(f)(3) of such Code is amended--
                  (A)(i) by striking ``, and the gross receipts'' in 
                subparagraph (A)(i) and all that follows through 
                ``determined under clause (iii)'',
                  (ii) by striking clause (iii) of subparagraph (A) and 
                redesignating clauses (iv), (v), and (vi), thereof, as 
                clauses (iii), (iv), and (v), respectively,
                  (iii) by striking ``and (iv)'' each place it appears 
                in subparagraph (A)(iv) (as so redesignated) and 
                inserting ``and (iii)'',
                  (iv) by striking subclause (IV) of subparagraph 
                (A)(iv) (as so redesignated), by striking ``, and'' at 
                the end of subparagraph (A)(iv)(III) (as so 
                redesignated) and inserting a period, and by adding 
                ``and'' at the end of subparagraph (A)(iv)(II) (as so 
                redesignated),
                  (v) by striking ``(A)(vi)'' in subparagraph (B) and 
                inserting ``(A)(v)'',
                  (vi) by striking ``(A)(iv)(II)'' in subparagraph 
                (B)(i)(II) and inserting ``(A)(iii)(II)'',
                  (B) by striking ``, and the gross receipts of the 
                predecessor,'' in subparagraph (A)(iv)(II) (as so 
                redesignated),
                  (C) by striking ``, and the gross receipts of,'' in 
                subparagraph (B),
                  (D) by striking ``, or gross receipts of,'' in 
                subparagraph (B)(i)(I), and
                  (E) by striking subparagraph (C) and inserting the 
                following new subparagraph:
                  ``(C) Adjustments for basic research payments.--In 
                the case of basic research payments, rules similar to 
                the rules of subparagraph (A) and (B) shall apply.''.
          (4) Section 41(f)(4) of such Code is amended by striking 
        ``and gross receipts'' and inserting ``and basic research 
        payments''.
          (5) Section 45C(b)(1) of such Code is amended by striking 
        subparagraph (D).
          (6) Section 45C(c)(2) of such Code is amended--
                  (A) by striking ``base period research expenses'' and 
                inserting ``average qualified research expenses'', and
                  (B) by striking ``base period research expenses'' in 
                the heading and inserting ``average qualified research 
                expenses''.
          (7) Section 280C(c) of such Code is amended--
                  (A) by striking ``basic research expenses (as defined 
                in section 41(e)(2))'' in paragraph (1) and inserting 
                ``basic research payments (as defined in section 
                41(e)(1))'', and
                  (B) by striking ``basic research expenses'' in 
                paragraph (2)(B) and inserting ``basic research 
                payments''.
  (e) Effective Date.--
          (1) In general.--Except as provided in paragraph (2), the 
        amendments made by this section shall apply to taxable years 
        beginning after December 31, 2014.
          (2) Subsection (b).--The amendment made by subsection (b) 
        shall apply to amounts paid or incurred after December 31, 
        2014.

                       I. SUMMARY AND BACKGROUND


                         A. Purpose and Summary

    H.R. 880, reported by the Committee on Ways and Means, 
provides a permanent simplified method for calculating the 
research credit with a rate of 20 percent, replacing the 
traditional 20-percent research credit calculation method. H.R. 
880 also provides a permanent basic research credit and energy 
research credit (both with credit rates of 20 percent), and 
changes the base period for the basic research credit from a 
fixed period to a three-year rolling average. Additionally, 
under the bill, eligible small businesses ($50 million or less 
in gross receipts) would be able to claim the credit against 
alternative minimum tax (``AMT'') liability. A temporary 
research credit expired for qualified expenditures made after 
December 31, 2014.

                 B. Background and Need for Legislation

    While the Committee continues actively to pursue 
comprehensive tax reform as a critical means of promoting 
economic growth and job creation, the Committee also believes 
that it is important to provide American employers permanent, 
immediate tax relief to help encourage economic growth and job 
creation. By providing a permanent simplified research credit, 
instead of the temporary measures enacted over the past three 
decades, H.R. 880 provides much-needed certainty for 
innovators, enhancing the effectiveness of the credit as an 
incentive for investments in research and development. Making 
the alternative simplified method the primary method for 
calculating the credit also eases administrative burdens for 
taxpayers and the Internal Revenue Service, eliminating 
substantial amounts of recordkeeping, documentation issues, and 
controversy connected with the historical base-period credit. 
By increasing the alternative simplified credit from 14 percent 
to 20 percent and permitting eligible small businesses to claim 
the credit against AMT liability, H.R. 880 further incentivizes 
critical research here in the United States.

                         C. Legislative History


Background

    H.R. 880 was introduced on February 11, 2015, and was 
referred to the Committee on Ways and Means.

Committee action

    The Committee on Ways and Means marked up H.R. 880, the 
American Research and Competitiveness Act of 2015, on February 
12, 2015, and ordered the bill, as amended, favorably reported 
(with a quorum being present).

Committee hearings

    The need for a permanent simplified research credit was 
discussed at no fewer than eight hearings during the 112th and 
113th Congresses:
           Full Committee Hearing on Fundamental Tax 
        Reform (January 20, 2011);
           Select Revenue Measures Subcommittee Hearing 
        on Small Businesses and Tax Reform (March 3, 2011);
           Full Committee Hearing on the Need for 
        Comprehensive Tax Reform to Help American Companies 
        Compete in the Global Market and Create Jobs for 
        American Workers (May 12, 2011);
           Full Committee Hearing on How Other 
        Countries Have Used Tax Reform to Help Their Companies 
        Compete in the Global Market and Create Jobs (May 24, 
        2011);
           Full Committee Hearing on How Business Tax 
        Reform Can Encourage Job Creation (June 2, 2011);
           Full Committee Hearing on the Interaction of 
        Tax and Financial Accounting on Tax Reform (February 8, 
        2012);
           Full Committee Hearing on Tax Reform and the 
        U.S. Manufacturing Sector (July 19, 2012); and
           Full Committee Hearing on the Benefits of 
        Permanent Tax Policy for America's Job Creators (April 
        8, 2014).

                      II. EXPLANATION OF THE BILL


 A. Research Credit Simplified and Made Permanent (sec. 41 of the Code)


                              PRESENT LAW

General rule

    For general research expenditures, a taxpayer may claim a 
research credit equal to 20 percent of the amount by which the 
taxpayer's qualified research expenses for a taxable year 
exceed its base amount for that year.\1\ Thus, the research 
credit is generally available with respect to incremental 
increases in qualified research. An alternative simplified 
research credit (with a 14-percent rate and a different base 
amount) may be claimed in lieu of this credit.\2\
---------------------------------------------------------------------------
    \1\Sec. 41(a)(1). Except where otherwise specified, all section 
references are to the Internal Revenue Code of 1986, as amended (the 
``Code'').
    \2\Sec. 41(c)(5).
---------------------------------------------------------------------------
    A 20-percent research tax credit also is available with 
respect to the excess of (1) 100 percent of corporate cash 
expenses (including grants or contributions) paid for basic 
research conducted by universities (and certain nonprofit 
scientific research organizations) over (2) the sum of (a) the 
greater of two minimum basic research floors plus (b) an amount 
reflecting any decrease in nonresearch giving to universities 
by the corporation as compared to such giving during a fixed-
base period, as adjusted for inflation.\3\ This separate credit 
computation commonly is referred to as the basic research 
credit.
---------------------------------------------------------------------------
    \3\Sec. 41(a)(2) and (e). The base period for the basic research 
credit generally extends from 1981 through 1983.
---------------------------------------------------------------------------
    Finally, a research credit is available for a taxpayer's 
expenditures on research undertaken by an energy research 
consortium.\4\ This separate credit computation commonly is 
referred to as the energy research credit. Unlike the other 
research credits, the energy research credit applies to all 
qualified expenditures, not just those in excess of a base 
amount.
---------------------------------------------------------------------------
    \4\Sec. 41(a)(3).
---------------------------------------------------------------------------
    The research credit, including the basic research credit 
and the energy research credit, expires for amounts paid or 
incurred after December 31, 2014.\5\
---------------------------------------------------------------------------
    \5\Sec. 41(h).
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Computation of general research credit

    The general research tax credit applies only to the extent 
that the taxpayer's qualified research expenses for the current 
taxable year exceed its base amount. The base amount for the 
current year generally is computed by multiplying the 
taxpayer's fixed-base percentage by the average amount of the 
taxpayer's gross receipts for the four preceding years. If a 
taxpayer both incurred qualified research expenses and had 
gross receipts during each of at least three years from 1984 
through 1988, then its fixed-base percentage is the ratio that 
its total qualified research expenses for the 1984-1988 period 
bears to its total gross receipts for that period (subject to a 
maximum fixed-base percentage of 16 percent). Special rules 
apply to all other taxpayers (so called start-up firms).\6\ In 
computing the research credit, a taxpayer's base amount cannot 
be less than 50 percent of its current-year qualified research 
expenses.
---------------------------------------------------------------------------
    \6\The Small Business Job Protection Act of 1996 expanded the 
definition of start-up firms under section 41(c)(3)(B)(i) to include 
any firm if the first taxable year in which such firm had both gross 
receipts and qualified research expenses began after 1983. A special 
rule (enacted in 1993) is designed to gradually recompute a start-up 
firm's fixed-base percentage based on its actual research experience. 
Under this special rule, a start-up firm is assigned a fixed-base 
percentage of three percent for each of its first five taxable years 
after 1993 in which it incurs qualified research expenses. A start-up 
firm's fixed-base percentage for its sixth through tenth taxable years 
after 1993 in which it incurs qualified research expenses is a phased-
in ratio based on the firm's actual research experience. For all 
subsequent taxable years, the taxpayer's fixed-base percentage is its 
actual ratio of qualified research expenses to gross receipts for any 
five years selected by the taxpayer from its fifth through tenth 
taxable years after 1993. Sec. 41(c)(3)(B).
---------------------------------------------------------------------------

Alternative simplified credit

    The alternative simplified research credit is equal to 14 
percent of qualified research expenses that exceed 50 percent 
of the average qualified research expenses for the three 
preceding taxable years.\7\ The rate is reduced to 6 percent if 
a taxpayer has no qualified research expenses in any one of the 
three preceding taxable years.\8\ An election to use the 
alternative simplified credit applies to all succeeding taxable 
years unless revoked with the consent of the Secretary.\9\
---------------------------------------------------------------------------
    \7\Sec. 41(c)(5)(A).
    \8\Sec. 41(c)(5)(B).
    \9\Sec. 41(c)(5)(C).
---------------------------------------------------------------------------

Eligible expenses

    Qualified research expenses eligible for the research tax 
credit consist of: (1) in-house expenses of the taxpayer for 
wages and supplies attributable to qualified research; (2) 
certain time-sharing costs for computer use in qualified 
research; and (3) 65 percent of amounts paid or incurred by the 
taxpayer to certain other persons for qualified research 
conducted on the taxpayer's behalf (so-called contract research 
expenses).\10\ Notwithstanding the limitation for contract 
research expenses, qualified research expenses include 100 
percent of amounts paid or incurred by the taxpayer to an 
eligible small business, university, or Federal laboratory for 
qualified energy research.
---------------------------------------------------------------------------
    \10\Under a special rule, 75 percent of amounts paid to a research 
consortium for qualified research are treated as qualified research 
expenses eligible for the research credit (rather than 65 percent under 
the general rule under section 41(b)(3) governing contract research 
expenses) if (1) such research consortium is a tax-exempt organization 
that is described in section 501(c)(3) (other than a private 
foundation) or section 501(c)(6) and is organized and operated 
primarily to conduct scientific research, and (2) such qualified 
research is conducted by the consortium on behalf of the taxpayer and 
one or more persons not related to the taxpayer. Sec. 41(b)(3)(C).
---------------------------------------------------------------------------
    To be eligible for the credit, the research not only has to 
satisfy the requirements of section 174, but also must be 
undertaken for the purpose of discovering information that is 
technological in nature, the application of which is intended 
to be useful in the development of a new or improved business 
component of the taxpayer, and substantially all of the 
activities of which constitute elements of a process of 
experimentation for functional aspects, performance, 
reliability, or quality of a business component. Research does 
not qualify for the credit if substantially all of the 
activities relate to style, taste, cosmetic, or seasonal design 
factors.\11\ In addition, research does not qualify for the 
credit if: (1) conducted after the beginning of commercial 
production of the business component; (2) related to the 
adaptation of an existing business component to a particular 
customer's requirements; (3) related to the duplication of an 
existing business component from a physical examination of the 
component itself or certain other information; (4) related to 
certain efficiency surveys, management function or technique, 
market research, market testing, or market development, routine 
data collection or routine quality control; (5) related to 
software developed primarily for internal use by the taxpayer; 
(6) conducted outside the United States, Puerto Rico, or any 
U.S. possession; (7) in the social sciences, arts, or 
humanities; or (8) funded by any grant, contract, or otherwise 
by another person (or government entity).\12\
---------------------------------------------------------------------------
    \11\Sec. 41(d)(3).
    \12\Sec. 41(d)(4).
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Relation to deduction

    Deductions allowed to a taxpayer under section 174 (or any 
other section) are reduced by an amount equal to 100 percent of 
the taxpayer's research tax credit determined for the taxable 
year.\13\ Taxpayers may alternatively elect to claim a reduced 
research tax credit amount under section 41 in lieu of reducing 
deductions otherwise allowed.\14\
---------------------------------------------------------------------------
    \13\Sec. 280C(c).
    \14\Sec. 280C(c)(3).
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Specified credits allowed against alternative minimum tax

    For any taxable year, the general business credit (which is 
the sum of the various business credits) generally may not 
exceed the excess of the taxpayer's net income tax\15\ over the 
greater of (1) the taxpayer's tentative minimum tax or (2) 25 
percent of so much of the taxpayer's net regular tax 
liability\16\ as exceeds $25,000.\17\ Any general business 
credit in excess of this limitation may be carried back one 
year and forward up to 20 years.\18\ The tentative minimum tax 
is an amount equal to specified rates of tax imposed on the 
excess of the alternative minimum taxable income over an 
exemption amount.\19\ Generally, the tentative minimum tax of a 
C corporation with average annual gross receipts of less than 
$7.5 million for prior 3-year periods is zero.\20\
---------------------------------------------------------------------------
    \15\The term net income tax means the sum of the regular tax 
liability and the alternative minimum tax, reduced by the credits 
allowable under sections 21 through 30D. Sec. 38(c)(1).
    \16\The term net regular tax liability means the regular tax 
liability reduced by the sum of certain nonrefundable personal and 
other credits. Sec. 38(c)(1).
    \17\Sec. 38(c)(1).
    \18\Sec. 39(a)(1).
    \19\See sec. 55(b). For example, assume a taxpayer has a regular 
tax of $80,000, a tentative minimum tax of $100,000, and a research 
credit determined under section 41 of $90,000 for a taxable year (and 
no other credits). Under present law, the taxpayer's research credit is 
limited to the excess of $100,000 over the greater of (1) $100,000 or 
(2) $13,750 (25% of the excess of $80,000 over $25,000). Accordingly, 
no research credit may be claimed ($100,000-$100,000 = $0) for the 
taxable year and the taxpayer's net tax liability is $100,000. The 
$90,000 research credit may be carried back or forward under the rules 
applicable to the general business credit.
    \20\Sec. 55(e).
---------------------------------------------------------------------------
    In applying the tax liability limitation to a list of 
``specified credits'' that are part of the general business 
credit, the tentative minimum tax is treated as being zero.\21\ 
Thus, the specified credits generally may offset both regular 
and alternative minimum tax liability (``AMT'').
---------------------------------------------------------------------------
    \21\See section 38(c)(4)(B) for the list of specified credits, 
which does not presently include the research credit determined under 
section 41.
---------------------------------------------------------------------------
    For taxable years beginning in 2010, an eligible small 
business was allowed to offset both the regular and AMT 
liability with the general business credits determined for the 
taxable year (``eligible small business credits'').\22\ For 
this purpose, an eligible small business was, with respect to 
any taxable year, a corporation, the stock of which was not 
publicly traded, a partnership, or a sole proprietor, if the 
average annual gross receipts did not exceed $50 million.\23\ 
Credits determined with respect to a partnership or S 
corporation were not treated as eligible small business credits 
by a partner or shareholder unless the partner or shareholder 
met the gross receipts test for the taxable year in which the 
credits were treated as current year business credits.\24\
---------------------------------------------------------------------------
    \22\Sec. 38(c)(5)(B).
    \23\Sec. 38(c)(5)(C).
    \24\Sec. 38(c)(5)(D).
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                           REASONS FOR CHANGE

    The Committee acknowledges that research is vital to 
creating jobs and economic growth. Research is the basis of new 
products, services, industries, and jobs for the domestic 
economy. The Committee believes that the temporary nature of 
the now-expired research credit limits its effectiveness, 
preventing businesses from making long-term investments in 
U.S.-based research and related business operations. 
Additionally, many taxpayers report that the general research 
credit can be complicated to calculate and that the base period 
is difficult to determine. The Committee believes that the 
alternative simplified credit is a more straightforward 
approach for calculating the research credit and that replacing 
the general credit with the simplified method would make the 
research credit more efficient and better achieve its intended 
purpose of fostering domestic research and experimentation. In 
addition, the Committee believes that small businesses should 
have better access to and be able to benefit from the research 
credit. Therefore, the Committee believes it is appropriate to 
simplify and make permanent the present-law research credit, as 
well as allow an eligible small business to claim it against 
the AMT.

                        EXPLANATION OF PROVISION

    The provision makes permanent the alternative simplified 
method for calculating the research credit and increases the 
rate to 20 percent. That is, the research credit is equal to 20 
percent of qualified research expenses that exceed 50 percent 
of the average qualified research expenses for the three 
preceding taxable years. The rate is reduced to 10 percent if a 
taxpayer has no qualified research expenses in any one of the 
three preceding taxable years. The provision repeals the 
traditional 20-percent research credit calculation method.
    The provision also makes permanent the basic research 
credit and the energy research credit (both with credit rates 
of 20 percent), and changes the base period for the basic 
research credit from a fixed period to a three-year rolling 
average.
    The provision also provides that, in the case of an 
eligible small business (as defined in section 38(c)(5)(C)), 
the research credit is a specified credit. Thus, the research 
credits of an eligible small business may offset both regular 
and AMT liability.\25\
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    \25\Using the above example, under this provision, the limitation 
would be the excess of $80,000 over the greater of (1) $0 or (2) 
$13,750. Since $13,750 is greater than $0, the $80,000 would be reduced 
by $13,750 such that the research credit limitation would be $66,250. 
Hence, the taxpayer would be able to claim a research credit of $66,250 
against its net income tax liability, as well as its AMT liability, 
which would result in $33,250 of total tax owed ($100,000--$66,250). 
The remaining $23,750 of its research credit ($90,000--$66,250) may be 
carried back or forward, as applicable.
---------------------------------------------------------------------------

                             EFFECTIVE DATE

    The provision is generally effective for taxable years 
beginning after December 31, 2014. The provision to make the 
research credit permanent applies to amounts paid or incurred 
after December 31, 2014.

                      III. VOTES OF THE COMMITTEE

    In compliance with clause 3(b) of rule XIII of the Rules of 
the House of Representatives, the following statement is made 
concerning the votes of the Committee on Ways and Means in its 
consideration of H.R. 880, the American Research and 
Competitiveness Act of 2015, on February 12, 2015.
    The vote on the motion by Mr. Brady to table Mr. Crowley's 
motion to appeal the ruling of the Chair that the amendment 
offered by Mr. Crowley was non-germane was agreed to by a roll 
call vote of 23 yeas to 11 nays (with a quorum being present). 
The vote was as follows:

----------------------------------------------------------------------------------------------------------------
         Representative             Yea       Nay     Present     Representative      Yea       Nay     Present
----------------------------------------------------------------------------------------------------------------
Mr. Ryan.......................        X   ........  .........  Mr. Levin........  ........        X   .........
Mr. Johnson....................        X   ........  .........  Mr. Rangel.......  ........        X   .........
Mr. Brady......................        X   ........  .........  Mr. McDermott....  ........        X   .........
Mr. Nunes......................        X   ........  .........  Mr. Lewis........  ........        X   .........
Mr. Tiberi.....................        X   ........  .........  Mr. Neal.........  ........  ........  .........
Mr. Reichert...................        X   ........  .........  Mr. Becerra......  ........  ........  .........
Mr. Boustany...................        X   ........  .........  Mr. Doggett......  ........        X   .........
Mr. Roskam.....................        X   ........  .........  Mr. Thompson.....  ........        X   .........
Mr. Price......................  ........  ........  .........  Mr. Larson.......  ........        X   .........
Mr. Buchanan...................        X   ........  .........  Mr. Blumenauer...  ........  ........  .........
Mr. Smith (NE).................        X   ........  .........  Mr. Kind.........  ........        X   .........
Mr. Schock.....................        X   ........  .........  Mr. Pascrell.....  ........        X   .........
Ms. Jenkins....................        X   ........  .........  Mr. Crowley......  ........        X   .........
Mr. Paulsen....................        X   ........  .........  Mr. Davis........  ........        X   .........
Mr. Marchant...................        X   ........  .........  Ms. Sanchez......  ........  ........  .........
Ms. Black......................        X   ........  .........
Mr. Reed.......................        X   ........  .........
Mr. Young......................        X   ........  .........
Mr. Kelly......................        X   ........  .........
Mr. Renacci....................        X   ........  .........
Mr. Meehan.....................        X   ........  .........
Ms. Noem.......................        X   ........  .........
Mr. Holding....................        X   ........  .........
Mr. Smith (MO).................        X   ........  .........
----------------------------------------------------------------------------------------------------------------

    The Chairman's amendment in the nature of a substitute was 
adopted by a voice vote (with a quorum being present).
    The bill, H.R. 880, was ordered favorably reported as 
amended by a roll call vote of 23 yeas to 12 nays (with a 
quorum being present). The vote was as follows:

----------------------------------------------------------------------------------------------------------------
         Representative             Yea       Nay     Present     Representative      Yea       Nay     Present
----------------------------------------------------------------------------------------------------------------
Mr. Ryan.......................        X   ........  .........  Mr. Levin........  ........        X   .........
Mr. Johnson....................        X   ........  .........  Mr. Rangel.......  ........        X   .........
Mr. Brady......................        X   ........  .........  Mr. McDermott....  ........        X   .........
Mr. Nunes......................        X   ........  .........  Mr. Lewis........  ........        X   .........
Mr. Tiberi.....................        X   ........  .........  Mr. Neal.........  ........  ........  .........
Mr. Reichert...................        X   ........  .........  Mr. Becerra......  ........  ........  .........
Mr. Boustany...................        X   ........  .........  Mr. Doggett......  ........        X   .........
Mr. Roskam.....................        X   ........  .........  Mr. Thompson.....  ........        X   .........
Mr. Price......................        X   ........  .........  Mr. Larson.......  ........        X   .........
Mr. Buchanan...................        X   ........  .........  Mr. Blumenauer...  ........        X   .........
Mr. Smith (NE).................        X   ........  .........  Mr. Kind.........  ........        X   .........
Mr. Schock.....................        X   ........  .........  Mr. Pascrell.....  ........        X   .........
Ms. Jenkins....................        X   ........  .........  Mr. Crowley......  ........        X   .........
Mr. Paulsen....................        X   ........  .........  Mr. Davis........  ........        X   .........
Mr. Marchant...................        X   ........  .........  Ms. Sanchez......  ........  ........  .........
Ms. Black......................        X   ........  .........
Mr. Reed.......................        X   ........  .........
Mr. Young......................  ........  ........  .........
Mr. Kelly......................        X   ........  .........
Mr. Renacci....................        X   ........  .........
Mr. Meehan.....................        X   ........  .........
Ms. Noem.......................        X   ........  .........
Mr. Holding....................        X   ........  .........
Mr. Smith (MO).................        X   ........  .........
----------------------------------------------------------------------------------------------------------------

                     IV. BUDGET EFFECTS OF THE BILL


               A. Committee Estimate of Budgetary Effects

    In compliance with clause 3(d) of rule XIII of the Rules of 
the House of Representatives, the following statement is made 
concerning the effects on the budget of the bill, H.R. 880, as 
reported.
    The bill, as reported, is estimated to have the following 
effect on Federal budget receipts for fiscal years 2015-2025.

                                                                                          FISCAL YEARS
                                                                                      [Millions of dollars]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
     2015           2016           2017           2018           2019           2020           2021           2022           2023           2024           2025         2015-20        2015-25
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
     -4,716         -8,768        -11,042        -13,212        -15,270        -17,229        -19,085        -20,824        -22,577        -23,894        -24,989        -70,237     -181,609
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
NOTE: Details do not add to totals due to rounding.

    Pursuant to clause 8 of rule XIII of the Rules of the House 
of Representatives, the following statement is made by the 
Joint Committee on Taxation with respect to the provisions of 
the bill amending the Internal Revenue Code of 1986: the gross 
budgetary effect (before incorporating macroeconomic effects) 
in any fiscal year is less than 0.25 percent of the current 
projected gross domestic product of the United States for that 
fiscal year; therefore, the bill is not ``major legislation'' 
for purposes of requiring that the estimate include the 
budgetary effects of changes in economic output, employment, 
capital stock and other macroeconomic variables.

B. Statement Regarding New Budget Authority and Tax Expenditures Budget 
                               Authority

    In compliance with clause 3(c)(2) of rule XIII of the Rules 
of the House of Representatives, the Committee states that the 
bill involves no new or increased budget authority. The 
Committee further states that the revenue-reducing tax 
provision involves increased tax expenditures. (See amounts in 
table in Part IV.A., above.)

      C. Cost Estimate Prepared by the Congressional Budget Office

    In compliance with clause 3(c)(3) of rule XIII of the Rules 
of the House of Representatives, requiring a cost estimate 
prepared by the CBO, the following statement by CBO is 
provided.

                                     U.S. Congress,
                               Congressional Budget Office,
                                 Washington, DC, February 19, 2015.
Hon. Paul Ryan,
Chairman, Committee Ways and Means,
House of Representatives, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for H.R. 880, the American 
Research and Competitiveness Act of 2015.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Logan 
Timmerhoff.
            Sincerely,
                                         Robert A. Sunshine
                              (For Douglas W. Elmendorf, Director).
    Enclosure.

H.R. 880--American Research and Competitiveness Act of 2015

    H.R. 880 would amend the Internal Revenue Code to make 
permanent a modified version of the tax credit for qualified 
research expenses that expired at the end of 2014. The bill 
would not extend the traditional calculation method and its 
associated 20 percent credit. It would, however, make permanent 
the ``alternative simplified method'' for calculating the tax 
credit for qualified research expenses and generally increase 
the associated credit to 20 percent of those expenses that 
exceed 50 percent of the average qualified research expenses 
for the three preceding taxable years. Among other changes, the 
bill also would make permanent a tax credit for basic research 
and energy research and would change the base period for the 
basic research credit from a fixed period to a three-year 
rolling average.
    The staff of the Joint Committee on Taxation (JCT) 
estimates that enacting H.R. 880 would reduce revenues, thus 
increasing federal deficits, by about $182 billion over the 
2015-2025 period.
    The Statutory Pay-As-You-Go Act of 2010 establishes budget-
reporting and enforcement procedures for legislation affecting 
direct spending and revenues. Enacting H.R. 880 would result in 
revenue losses in each year beginning in 2015. The estimated 
increases in the deficit are shown in the following table.
    JCT has determined that the bill contains no 
intergovernmental or private-sector mandates as defined in the 
Unfunded Mandates Reform Act.
    The CBO staff contact for this estimate is Logan 
Timmerhoff. The estimate was approved by David Weiner, 
Assistant Director for Tax Analysis.

          CBO ESTIMATE OF PAY-AS-YOU-GO EFFECTS FOR H.R. 880, AS ORDERED REPORTED BY THE HOUSE COMMITTEE ON WAYS AND MEANS ON FEBRUARY 12, 2015
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                          By fiscal year, in millions of dollars--
                                  ----------------------------------------------------------------------------------------------------------------------
                                    2015    2016     2017     2018     2019     2020     2021     2022     2023     2024     2025   2015-2020  2015-2025
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                               NET INCREASE IN THE DEFICIT
 
Statutory Pay-As-You-Go Impact...   4,716   8,768   11,042   13,212   15,270   17,229   19,085   20,824   22,577   23,894   24,989    70,237    181,609
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: Staff of the Joint Committee on Taxation.
Note: Components may not sum to totals because of rounding.

     V. OTHER MATTERS TO BE DISCUSSED UNDER THE RULES OF THE HOUSE


          A. Committee Oversight Findings and Recommendations

    With respect to clause 3(c)(1) of rule XIII of the Rules of 
the House of Representatives (relating to oversight findings), 
the Committee advises that it was as a result of the 
Committee's review of the provisions of H.R. 880 that the 
Committee concluded that it is appropriate to report the bill, 
as amended, favorably to the House of Representatives with the 
recommendation that the bill do pass.

        B. Statement of General Performance Goals and Objectives

    With respect to clause 3(c)(4) of rule XIII of the Rules of 
the House of Representatives, the Committee advises that the 
bill contains no measure that authorizes funding, so no 
statement of general performance goals and objectives for which 
any measure authorizes funding is required.

              C. Information Relating to Unfunded Mandates

    This information is provided in accordance with section 423 
of the Unfunded Mandates Reform Act of 1995 (Pub. L. No. 104-
4). The Committee has determined that the bill does not contain 
Federal mandates on the private sector. The Committee has 
determined that the bill does not impose a Federal 
intergovernmental mandate on State, local, or tribal 
governments.

                D. Applicability of House Rule XXI 5(b)

    Rule XXI 5(b) of the Rules of the House of Representatives 
provides, in part, that ``A bill or joint resolution, 
amendment, or conference report carrying a Federal income tax 
rate increase may not be considered as passed or agreed to 
unless so determined by a vote of not less than three-fifths of 
the Members voting, a quorum being present.'' The Committee has 
carefully reviewed the bill, and states that the bill does not 
involve any Federal income tax rate increases within the 
meaning of the rule.

                       E. Tax Complexity Analysis

    Section 4022(b) of the Internal Revenue Service 
Restructuring and Reform Act of 1998 (the ``IRS Reform Act'') 
requires the staff of the Joint Committee on Taxation (in 
consultation with the Internal Revenue Service and the Treasury 
Department) to provide a tax complexity analysis. The 
complexity analysis is required for all legislation reported by 
the Senate Committee on Finance, the House Committee on Ways 
and Means, or any committee of conference if the legislation 
includes a provision that directly or indirectly amends the 
Internal Revenue Code and has widespread applicability to 
individuals or small businesses.
    Pursuant to clause 3(h)(1) of rule XIII of the Rules of the 
House of Representatives, the staff of the Joint Committee on 
Taxation has determined that a complexity analysis is not 
required under section 4022(b) of the IRS Reform Act because 
the bill contains no provisions that amend the Code and that 
have ``widespread applicability'' to individuals or small 
businesses, within the meaning of the rule.

  F. Congressional Earmarks, Limited Tax Benefits, and Limited Tariff 
                                Benefits

    With respect to clause 9 of rule XXI of the Rules of the 
House of Representatives, the Committee has carefully reviewed 
the provisions of the bill, and states that the provisions of 
the bill do not contain any congressional earmarks, limited tax 
benefits, or limited tariff benefits within the meaning of the 
rule.

                   G. Duplication of Federal Programs

    In compliance with Sec. 3(g)(2) of H. Res. 5 (114th 
Congress), the Committee states that no provision of the bill 
establishes or reauthorizes a program related to a program 
identified in the most recent Catalog of Federal Domestic 
Assistance, published pursuant to the Federal Program 
Information Act (Public Law 95-220, as amended by Public Law 
98-169). The Committee also states that the Government 
Accountability Office has included the research tax credit in a 
report to Congress pursuant to section 21 of Public Law 111-
139.

                 H. Disclosure of Directed Rule Makings

    In compliance with Sec. 3(i) of H. Res. 5 (114th Congress), 
the following statement is made concerning directed rule 
makings: The Committee estimates that the bill requires no 
directed rule makings within the meaning of such section.

     VI. CHANGES IN EXISTING LAW PROPOSED BY THE BILL, AS REPORTED


  A. Text of Existing Law Amended or Repealed by the Bill, as Reported

    In compliance with clause 3(e)(1)(A) of rule XIII of the 
Rules of the House of Representatives, the text of each section 
proposed to be amended or repealed by the bill, as reported, is 
shown below:

INTERNAL REVENUE CODE OF 1986

           *       *       *       *       *       *       *



Subtitle A--Income Taxes

           *       *       *       *       *       *       *


CHAPTER 1--NORMAL TAXES AND SURTAXES

           *       *       *       *       *       *       *


Subchapter A--Determination of Tax Liability

           *       *       *       *       *       *       *


PART IV--CREDITS AGAINST TAX

           *       *       *       *       *       *       *



Subpart D--Business Related Credits

           *       *       *       *       *       *       *



SEC. 38. GENERAL BUSINESS CREDIT.

  (a) Allowance of Credit.--There shall be allowed as a credit 
against the tax imposed by this chapter for the taxable year an 
amount equal to the sum of--
          (1) the business credit carryforwards carried to such 
        taxable year,
          (2) the amount of the current year business credit, 
        plus
          (3) the business credit carrybacks carried to such 
        taxable year.
  (b) Current Year Business Credit.--For purposes of this 
subpart, the amount of the current year business credit is the 
sum of the following credits determined for the taxable year:
          (1) the investment credit determined under section 
        46,
          (2) the work opportunity credit determined under 
        section 51(a),
          (3) the alcohol fuels credit determined under section 
        40(a),
          (4) the research credit determined under section 
        41(a),
          (5) the low-income housing credit determined under 
        section 42(a),
          (6) the enhanced oil recovery credit under section 
        43(a),
          (7) in the case of an eligible small business (as 
        defined in section 44(b)), the disabled access credit 
        determined under section 44(a),
          (8) the renewable electricity production credit under 
        section 45(a),
          (9) the empowerment zone employment credit determined 
        under section 1396(a),
          (10) the Indian employment credit as determined under 
        section 45A(a),
          (11) the employer social security credit determined 
        under section 45B(a),
          (12) the orphan drug credit determined under section 
        45C(a),
          (13) the new markets tax credit determined under 
        section 45D(a),
          (14) in the case of an eligible employer (as defined 
        in section 45E(c)), the small employer pension plan 
        startup cost credit determined under section 45E(a),
          (15) the employer-provided child care credit 
        determined under section 45F(a),
          (16) the railroad track maintenance credit determined 
        under section 45G(a),
          (17) the biodiesel fuels credit determined under 
        section 40A(a),
          (18) the low sulfur diesel fuel production credit 
        determined under section 45H(a),
          (19) the marginal oil and gas well production credit 
        determined under section 45I(a),
          (20) the distilled spirits credit determined under 
        section 5011(a),
          (21) the advanced nuclear power facility production 
        credit determined under section 45J(a),
          (22) the nonconventional source production credit 
        determined under section 45K(a),
          (23) the new energy efficient home credit determined 
        under section 45L(a),
          (24) the energy efficient appliance credit determined 
        under section 45M(a),
          (25) the portion of the alternative motor vehicle 
        credit to which section 30B(g)(1) applies,
          (26) the portion of the alternative fuel vehicle 
        refueling property credit to which section 30C(d)(1) 
        applies,
          (27) the Hurricane Katrina housing credit determined 
        under section 1400P(b),
          (28) the Hurricane Katrina employee retention credit 
        determined under section 1400R(a),
          (29) the Hurricane Rita employee retention credit 
        determined under section 1400R(b),
          (30) the Hurricane Wilma employee retention credit 
        determined under section 1400R(c),
          (31) the mine rescue team training credit determined 
        under section 45N(a),
          (32) in the case of an eligible agricultural business 
        (as defined in section 45O(e)), the agricultural 
        chemicals security credit determined under section 
        45O(a),
          (33) the differential wage payment credit determined 
        under section 45P(a),
          (34) the carbon dioxide sequestration credit 
        determined under section 45Q(a)
          (35) the portion of the new qualified plug-in 
        electric drive motor vehicle credit to which section 
        30D(c)(1) applies, plus
          (36) the small employer health insurance credit 
        determined under section 45R.
  (c) Limitation Based on Amount of Tax.--
          (1) In general.--The credit allowed under subsection 
        (a) for any taxable year shall not exceed the excess 
        (if any) of the taxpayer's net income tax over the 
        greater of--
                  (A) the tentative minimum tax for the taxable 
                year, or
                  (B) 25 percent of so much of the taxpayer's 
                net regular tax liability as exceeds $25,000.
        For purposes of the preceding sentence, the term ``net 
        income tax'' means the sum of the regular tax liability 
        and the tax imposed by section 55, reduced by the 
        credits allowable under subparts A and B of this part, 
        and the term ``net regular tax liability'' means the 
        regular tax liability reduced by the sum of the credits 
        allowable under subparts A and B of this part.
          (2) Empowerment zone employment credit may offset 25 
        percent of minimum tax.--
                  (A) In general.--In the case of the 
                empowerment zone employment credit--
                          (i) this section and section 39 shall 
                        be applied separately with respect to 
                        such credit, and
                          (ii) for purposes of applying 
                        paragraph (1) to such credit--
                                  (I) 75 percent of the 
                                tentative minimum tax shall be 
                                substituted for the tentative 
                                minimum tax under subparagraph 
                                (A) thereof, and
                                  (II) the limitation under 
                                paragraph (1) (as modified by 
                                subclause (I)) shall be reduced 
                                by the credit allowed under 
                                subsection (a) for the taxable 
                                year (other than the 
                                empowerment zone employment 
                                credit, the New York Liberty 
                                Zone business employee credit, 
                                the eligible small business 
                                credits, and the specified 
                                credits).
                  (B) Empowerment zone employment credit.--For 
                purposes of this paragraph, the term 
                ``empowerment zone employment credit'' means 
                the portion of the credit under subsection (a) 
                which is attributable to the credit determined 
                under section 1396 (relating to empowerment 
                zone employment credit).
          (3) Special rules for new york liberty zone business 
        employee credit.--
                  (A) In general.--In the case of the New York 
                Liberty Zone business employee credit--
                          (i) this section and section 39 shall 
                        be applied separately with respect to 
                        such credit, and
                          (ii) in applying paragraph (1) to 
                        such credit--
                                  (I) the tentative minimum tax 
                                shall be treated as being zero, 
                                and
                                  (II) the limitation under 
                                paragraph (1) (as modified by 
                                subclause (I)) shall be reduced 
                                by the credit allowed under 
                                subsection (a) for the taxable 
                                year (other than the New York 
                                Liberty Zone business employee 
                                credit, the eligible small 
                                business credits, and the 
                                specified credits).
                  (B) New york liberty zone business employee 
                credit.--For purposes of this subsection, the 
                term ``New York Liberty Zone business employee 
                credit'' means the portion of work opportunity 
                credit under section 51 determined under 
                section 1400L(a).
          (4) Special rules for specified credits.--
                  (A) In general.--In the case of specified 
                credits--
                          (i) this section and section 39 shall 
                        be applied separately with respect to 
                        such credits, and
                          (ii) in applying paragraph (1) to 
                        such credits--
                                  (I) the tentative minimum tax 
                                shall be treated as being zero, 
                                and
                                  (II) the limitation under 
                                paragraph (1) (as modified by 
                                subclause (I)) shall be reduced 
                                by the credit allowed under 
                                subsection (a) for the taxable 
                                year (other than the eligible 
                                small business credits and the 
                                specified credits).
                  (B) Specified credits.--For purposes of this 
                subsection, the term ``specified credits'' 
                means--
                          (i) for taxable years beginning after 
                        December 31, 2004, the credit 
                        determined under section 40,
                          (ii) the credit determined under 
                        section 42 to the extent attributable 
                        to buildings placed in service after 
                        December 31, 2007,
                          (iii) the credit determined under 
                        section 45 to the extent that such 
                        credit is attributable to electricity 
                        or refined coal produced--
                                  (I) at a facility which is 
                                originally placed in service 
                                after the date of the enactment 
                                of this paragraph, and
                                  (II) during the 4-year period 
                                beginning on the date that such 
                                facility was originally placed 
                                in service,
                          (iv) the credit determined under 
                        section 45B,
                          (v) the credit determined under 
                        section 45G,
                          (vi) the credit determined under 
                        section 45R,
                          (vii) the credit determined under 
                        section 46 to the extent that such 
                        credit is attributable to the energy 
                        credit determined under section 48,
                          (viii) the credit determined under 
                        section 46 to the extent that such 
                        credit is attributable to the 
                        rehabilitation credit under section 47, 
                        but only with respect to qualified 
                        rehabilitation expenditures properly 
                        taken into account for periods after 
                        December 31, 2007, and
                          (ix) the credit determined under 
                        section 51.
          (5) Special rules for eligible small business credits 
        in 2010.--
                  (A) In general.--In the case of eligible 
                small business credits determined in taxable 
                years beginning in 2010--
                          (i) this section and section 39 shall 
                        be applied separately with respect to 
                        such credits, and
                          (ii) in applying paragraph (1) to 
                        such credits--
                                  (I) the tentative minimum tax 
                                shall be treated as being zero, 
                                and
                                  (II) the limitation under 
                                paragraph (1) (as modified by 
                                subclause (I)) shall be reduced 
                                by the credit allowed under 
                                subsection (a) for the taxable 
                                year (other than the eligible 
                                small business credits).
                  (B) Eligible small business credits.--For 
                purposes of this subsection, the term 
                ``eligible small business credits'' means the 
                sum of the credits listed in subsection (b) 
                which are determined for the taxable year with 
                respect to an eligible small business. Such 
                credits shall not be taken into account under 
                paragraph (2), (3), or (4).
                  (C) Eligible small business.--For purposes of 
                this subsection, the term ``eligible small 
                business'' means, with respect to any taxable 
                year--
                          (i) a corporation the stock of which 
                        is not publicly traded,
                          (ii) a partnership, or
                          (iii) a sole proprietorship, if the 
                        average annual gross receipts of such 
                        corporation, partnership, or sole 
                        proprietorship for the 3-taxable-year 
                        period preceding such taxable year does 
                        not exceed $50,000,000. For purposes of 
                        applying the test under the preceding 
                        sentence, rules similar to the rules of 
                        paragraphs (2) and (3) of section 
                        448(c) shall apply.
                  (D) Treatment of partners and S corporation 
                shareholders.--Credits determined with respect 
                to a partnership or S corporation shall not be 
                treated as eligible small business credits by 
                any partner or shareholder unless such partner 
                or shareholder meets the gross receipts test 
                under subparagraph (C) for the taxable year in 
                which such credits are treated as current year 
                business credits.
          (6) Special rules.--
                  (A) Married individuals.--In the case of a 
                husband or wife who files a separate return, 
                the amount specified under subparagraph (B) of 
                paragraph (1) shall be $12,500 in lieu of 
                $25,000. This subparagraph shall not apply if 
                the spouse of the taxpayer has no business 
                credit carryforward or carryback to, and has no 
                current year business credit for, the taxable 
                year of such spouse which ends within or with 
                the taxpayer's taxable year.
                  (B) Controlled groups.--In the case of a 
                controlled group, the $25,000 amount specified 
                under subparagraph (B) of paragraph (1) shall 
                be reduced for each component member of such 
                group by apportioning $25,000 among the 
                component members of such group in such manner 
                as the Secretary shall by regulations 
                prescribe. For purposes of the preceding 
                sentence, the term ``controlled group'' has the 
                meaning given to such term by section 1563(a).
                  (C) Limitations with respect to certain 
                persons.--In the case of a person described in 
                subparagraph (A) or (B) of section 46(e)(1) (as 
                in effect on the day before the date of the 
                enactment of the Revenue Reconciliation Act of 
                1990), the $25,000 amount specified under 
                subparagraph (B) of paragraph (1) shall equal 
                such person's ratable share (as determined 
                under section 46(e)(2) (as so in effect) of 
                such amount.
                  (D) Estates and trusts.--In the case of an 
                estate or trust, the $25,000 amount specified 
                under subparagraph (B) of paragraph (1) shall 
                be reduced to an amount which bears the same 
                ratio to $25,000 as the portion of the income 
                of the estate or trust which is not allocated 
                to beneficiaries bears to the total income of 
                the estate or trust.
  (d) Ordering Rules.--For purposes of any provision of this 
title where it is necessary to ascertain the extent to which 
the credits determined under any section referred to in 
subsection (b) are used in a taxable year or as a carryback or 
carryforward--
          (1) In general.--The order in which such credits are 
        used shall be determined on the basis of the order in 
        which they are listed in subsection (b) as of the close 
        of the taxable year in which the credit is used.
          (2) Components of investment credit.--The order in 
        which the credits listed in section 46 are used shall 
        be determined on the basis of the order in which such 
        credits are listed in section 46 as of the close of the 
        taxable year in which the credit is used.

           *       *       *       *       *       *       *


SEC. 41. CREDIT FOR INCREASING RESEARCH ACTIVITIES.

  (a) General Rule.--For purposes of section 38, the research 
credit determined under this section for the taxable year shall 
be an amount equal to the sum of--
          (1) 20 percent of the excess (if any) of--
                  (A) the qualified research expenses for the 
                taxable year, over
                  (B) the base amount,
          (2) 20 percent of the basic research payments 
        determined under subsection (e)(1)(A), and
          (3) 20 percent of the amounts paid or incurred by the 
        taxpayer in carrying on any trade or business of the 
        taxpayer during the taxable year (including as 
        contributions) to an energy research consortium for 
        energy research.
  (b) Qualified Research Expenses.--For purposes of this 
section--
          (1) Qualified research expenses.--The term 
        ``qualified research expenses'' means the sum of the 
        following amounts which are paid or incurred by the 
        taxpayer during the taxable year in carrying on any 
        trade or business of the taxpayer--
                  (A) in-house research expenses, and
                  (B) contract research expenses.
          (2) In-house research expenses.--
                  (A) In general.--The term ``in-house research 
                expenses'' means--
                          (i) any wages paid or incurred to an 
                        employee for qualified services 
                        performed by such employee,
                          (ii) any amount paid or incurred for 
                        supplies used in the conduct of 
                        qualified research, and
                          (iii) under regulations prescribed by 
                        the Secretary, any amount paid or 
                        incurred to another person for the 
                        right to use computers in the conduct 
                        of qualified research.
                Clause (iii) shall not apply to any amount to 
                the extent that the taxpayer (or any person 
                with whom the taxpayer must aggregate 
                expenditures under subsection (f)(1)) receives 
                or accrues any amount from any other person for 
                the right to use substantially identical 
                personal property.
                  (B) Qualified services.--The term ``qualified 
                services'' means services consisting of--
                          (i) engaging in qualified research, 
                        or
                          (ii) engaging in the direct 
                        supervision or direct support of 
                        research activities which constitute 
                        qualified research.
                If substantially all of the services performed 
                by an individual for the taxpayer during the 
                taxable year consists of services meeting the 
                requirements of clause (i) or (ii), the term 
                ``qualified services'' means all of the 
                services performed by such individual for the 
                taxpayer during the taxable year.
                  (C) Supplies.--The term ``supplies'' means 
                any tangible property other than--
                          (i) land or improvements to land, and
                          (ii) property of a character subject 
                        to the allowance for depreciation.
                  (D) Wages.--
                          (i) In general.--The term ``wages'' 
                        has the meaning given such term by 
                        section 3401(a).
                          (ii) Self-employed individuals and 
                        owner-employees.--In the case of an 
                        employee (within the meaning of section 
                        401(c)(1)), the term ``wages'' includes 
                        the earned income (as defined in 
                        section 401(c)(2)) of such employee.
                          (iii) Exclusion for wages to which 
                        work opportunity credit applies.--The 
                        term ``wages'' shall not include any 
                        amount taken into account in 
                        determining the work opportunity credit 
                        under section 51(a).
          (3) Contract research expenses.--
                  (A) In general.--The term ``contract research 
                expenses'' means 65 percent of any amount paid 
                or incurred by the taxpayer to any person 
                (other than an employee of the taxpayer) for 
                qualified research.
                  (B) Prepaid amounts.--If any contract 
                research expenses paid or incurred during any 
                taxable year are attributable to qualified 
                research to be conducted after the close of 
                such taxable year, such amount shall be treated 
                as paid or incurred during the period during 
                which the qualified research is conducted.
                  (C) Amounts paid to certain research 
                consortia.--
                          (i) In general.--Subparagraph (A) 
                        shall be applied by substituting ``75 
                        percent'' for ``65 percent'' with 
                        respect to amounts paid or incurred by 
                        the taxpayer to a qualified research 
                        consortium for qualified research on 
                        behalf of the taxpayer and 1 or more 
                        unrelated taxpayers. For purposes of 
                        the preceding sentence, all persons 
                        treated as a single employer under 
                        subsection (a) or (b) of section 52 
                        shall be treated as related taxpayers.
                          (ii) Qualified research consortium.--
                        The term ``qualified research 
                        consortium'' means any organization 
                        which--
                                  (I) is described in section 
                                501(c)(3) or 501(c)(6) 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.
                  (D) Amounts paid to eligible small 
                businesses, universities, and federal 
                laboratories.--
                          (i) In general.--In the case of 
                        amounts paid by the taxpayer to--
                                  (I) an eligible small 
                                business,
                                  (II) an institution of higher 
                                education (as defined in 
                                section 3304(f)), or
                                  (III) an organization which 
                                is a Federal laboratory,
                        for qualified research which is energy 
                        research, subparagraph (A) shall be 
                        applied by substituting ``100 percent'' 
                        for ``65 percent''.
                          (ii) Eligible small business.--For 
                        purposes of this subparagraph, the term 
                        ``eligible small business'' means a 
                        small business with respect to which 
                        the taxpayer does not own (within the 
                        meaning of section 318) 50 percent or 
                        more of--
                                  (I) in the case of a 
                                corporation, the outstanding 
                                stock of the corporation 
                                (either by vote or value), and
                                  (II) in the case of a small 
                                business which is not a 
                                corporation, the capital and 
                                profits interests of the small 
                                business.
                          (iii) Small business.--For purposes 
                        of this subparagraph--
                                  (I) In general.--The term 
                                ``small business'' means, with 
                                respect to any calendar year, 
                                any person if the annual 
                                average number of employees 
                                employed by such person during 
                                either of the 2 preceding 
                                calendar years was 500 or 
                                fewer. For purposes of the 
                                preceding sentence, a preceding 
                                calendar year may be taken into 
                                account only if the person was 
                                in existence throughout the 
                                year.
                                  (II) Startups, controlled 
                                groups, and predecessors.--
                                Rules similar to the rules of 
                                subparagraphs (B) and (D) of 
                                section 220(c)(4) shall apply 
                                for purposes of this clause.
                          (iv) Federal laboratory.--For 
                        purposes of this subparagraph, the term 
                        ``Federal laboratory'' has the meaning 
                        given such term by section 4(6) of the 
                        Stevenson-Wydler Technology Innovation 
                        Act of 1980 (15 U.S.C. 3703(6)), as in 
                        effect on the date of the enactment of 
                        the Energy Tax Incentives Act of 2005.
          (4) Trade or business requirement disregarded for in-
        house research expenses of certain startup ventures.--
        In the case of in-house research expenses, a taxpayer 
        shall be treated as meeting the trade or business 
        requirement of paragraph (1) if, at the time such in-
        house research expenses are paid or incurred, the 
        principal purpose of the taxpayer in making such 
        expenditures is to use the results of the research in 
        the active conduct of a future trade or business--
                  (A) of the taxpayer, or
                  (B) of 1 or more other persons who with the 
                taxpayer are treated as a single taxpayer under 
                subsection (f)(1).
  (c) Base Amount.--
          (1) In general.--The term ``base amount'' means the 
        product of--
                  (A) the fixed-base percentage, and
                  (B) the average annual gross receipts of the 
                taxpayer for the 4 taxable years preceding the 
                taxable year for which the credit is being 
                determined (hereinafter in this subsection 
                referred to as the ``credit year'').
          (2) Minimum base amount.--In no event shall the base 
        amount be less than 50 percent of the qualified 
        research expenses for the credit year.
          (3) Fixed-base percentage.--
                  (A) In general.--Except as otherwise provided 
                in this paragraph, the fixed-base percentage is 
                the percentage which the aggregate qualified 
                research expenses of the taxpayer for taxable 
                years beginning after December 31, 1983, and 
                before January 1, 1989, is of the aggregate 
                gross receipts of the taxpayer for such taxable 
                years.
                  (B) Start-up companies.--
                          (i) Taxpayers to which subparagraph 
                        applies.--The fixed-base percentage 
                        shall be determined under this 
                        subparagraph if--
                                  (I) the first taxable year in 
                                which a taxpayer had both gross 
                                receipts and qualified research 
                                expenses begins after December 
                                31, 1983, or
                                  (II) there are fewer than 3 
                                taxable years beginning after 
                                December 31, 1983, and before 
                                January 1, 1989, in which the 
                                taxpayer had both gross 
                                receipts and qualified research 
                                expenses.
                          (ii) Fixed-base percentage.--In a 
                        case to which this subparagraph 
                        applies, the fixed-base percentage is--
                                  (I) 3 percent for each of the 
                                taxpayer's 1st 5 taxable years 
                                beginning after December 31, 
                                1993, for which the taxpayer 
                                has qualified research 
                                expenses,
                                  (II) in the case of the 
                                taxpayer's 6th such taxable 
                                year, 1/6 of the percentage 
                                which the aggregate qualified 
                                research expenses of the 
                                taxpayer for the 4th and 5th 
                                such taxable years is of the 
                                aggregate gross receipts of the 
                                taxpayer for such years,
                                  (III) in the case of the 
                                taxpayer's 7th such taxable 
                                year, 1/3 of the percentage 
                                which the aggregate qualified 
                                research expenses of the 
                                taxpayer for the 5th and 6th 
                                such taxable years is of the 
                                aggregate gross receipts of the 
                                taxpayer for such years,
                                  (IV) in the case of the 
                                taxpayer's 8th such taxable 
                                year, 1/2 of the percentage 
                                which the aggregate qualified 
                                research expenses of the 
                                taxpayer for the 5th, 6th, and 
                                7th such taxable years is of 
                                the aggregate gross receipts of 
                                the taxpayer for such years,
                                  (V) in the case of the 
                                taxpayer's 9th such taxable 
                                year, 2/3 of the percentage 
                                which the aggregate qualified 
                                research expenses of the 
                                taxpayer for the 5th, 6th, 7th, 
                                and 8th such taxable years is 
                                of the aggregate gross receipts 
                                of the taxpayer for such years,
                                  (VI) in the case of the 
                                taxpayer's 10th such taxable 
                                year, 5/6 of the percentage 
                                which the aggregate qualified 
                                research expenses of the 
                                taxpayer for the 5th, 6th, 7th, 
                                8th, and 9th such taxable years 
                                is of the aggregate gross 
                                receipts of the taxpayer for 
                                such years, and
                                  (VII) for taxable years 
                                thereafter, the percentage 
                                which the aggregate qualified 
                                research expenses for any 5 
                                taxable years selected by the 
                                taxpayer from among the 5th 
                                through the 10th such taxable 
                                years is of the aggregate gross 
                                receipts of the taxpayer for 
                                such selected years.
                          (iii) Treatment of de minimis amounts 
                        of gross receipts and qualified 
                        research expenses.--The Secretary may 
                        prescribe regulations providing that de 
                        minimis amounts of gross receipts and 
                        qualified research expenses shall be 
                        disregarded under clauses (i) and (ii).
                  (C) Maximum fixed-base percentage.--In no 
                event shall the fixed-base percentage exceed 16 
                percent.
                  (D) Rounding.--The percentages determined 
                under subparagraphs (A) and (B)(ii) shall be 
                rounded to the nearest 1/100th of 1 percent.
          (4) Election of alternative incremental credit.--
                  (A) In general.--At the election of the 
                taxpayer, the credit determined under 
                subsection (a)(1) shall be equal to the sum 
                of--
                          (i) 3 percent of so much of the 
                        qualified research expenses for the 
                        taxable year as exceeds 1 percent of 
                        the average described in subsection 
                        (c)(1)(B) but does not exceed 1.5 
                        percent of such average,
                          (ii) 4 percent of so much of such 
                        expenses as exceeds 1.5 percent of such 
                        average but does not exceed 2 percent 
                        of such average, and
                          (iii) 5 percent of so much of such 
                        expenses as exceeds 2 percent of such 
                        average.
                  (B) Election.--An election under this 
                paragraph shall apply to the taxable year for 
                which made and all succeeding taxable years 
                unless revoked with the consent of the 
                Secretary.
          (5) Election of alternative simplified credit.--
                  (A) In general.--At the election of the 
                taxpayer, the credit determined under 
                subsection (a)(1) shall be equal to 14 percent 
                (12 percent in the case of taxable years ending 
                before January 1, 2009) of so much of the 
                qualified research expenses for the 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.
                  (B) Special rule in case of no qualified 
                research expenses in any of 3 preceding taxable 
                years.--
                          (i) Taxpayers to which subparagraph 
                        applies.--The credit under this 
                        paragraph shall be determined under 
                        this subparagraph if the taxpayer has 
                        no qualified research expenses in any 
                        one of the 3 taxable years preceding 
                        the taxable year for which the credit 
                        is being determined.
                          (ii) Credit rate.--The credit 
                        determined under this subparagraph 
                        shall be equal to 6 percent of the 
                        qualified research expenses for the 
                        taxable year.
                  (C) Election.--An election under this 
                paragraph shall apply to the taxable year for 
                which made and all succeeding taxable years 
                unless revoked with the consent of the 
                Secretary. An election under this paragraph may 
                not be made for any taxable year to which an 
                election under paragraph (4) applies.
          (6) Consistent treatment of expenses required.--
                  (A) In general.--Notwithstanding whether the 
                period for filing a claim for credit or refund 
                has expired for any taxable year taken into 
                account in determining the fixed-base 
                percentage, the qualified research expenses 
                taken into account in computing such percentage 
                shall be determined on a basis consistent with 
                the determination of qualified research 
                expenses for the credit year.
                  (B) Prevention of distortions.--The Secretary 
                may prescribe regulations to prevent 
                distortions in calculating a taxpayer's 
                qualified research expenses or gross receipts 
                caused by a change in accounting methods used 
                by such taxpayer between the current year and a 
                year taken into account in computing such 
                taxpayer's fixed-base percentage.
          (7) Gross receipts.--For purposes of this subsection, 
        gross receipts for any taxable year shall be reduced by 
        returns and allowances made during the taxable year. In 
        the case of a foreign corporation, there shall be taken 
        into account only gross receipts which are effectively 
        connected with the conduct of a trade or business 
        within the United States, the Commonwealth of Puerto 
        Rico, or any possession of the United States.
  (d) Qualified Research Defined.--For purposes of this 
section--
          (1) In general.--The term ``qualified research'' 
        means research--
                  (A) with respect to which expenditures may be 
                treated as expenses under section 174,
                  (B) which is undertaken for the purpose of 
                discovering information--
                          (i) which is technological in nature, 
                        and
                          (ii) the application of which is 
                        intended to be useful in the 
                        development of a new or improved 
                        business component of the taxpayer, and
                  (C) substantially all of the activities of 
                which constitute elements of a process of 
                experimentation for a purpose described in 
                paragraph (3).
        Such term does not include any activity described in 
        paragraph (4).
          (2) Tests to be applied separately to each business 
        component.--For purposes of this subsection--
                  (A) In general.--Paragraph (1) shall be 
                applied separately with respect to each 
                business component of the taxpayer.
                  (B) Business component defined.--The term 
                ``business component'' means any product, 
                process, computer software, technique, formula, 
                or invention which is to be--
                          (i) held for sale, lease, or license, 
                        or
                          (ii) used by the taxpayer in a trade 
                        or business of the taxpayer.
                  (C) Special rule for production processes.--
                Any plant process, machinery, or technique for 
                commercial production of a business component 
                shall be treated as a separate business 
                component (and not as part of the business 
                component being produced).
          (3) Purposes for which research may qualify for 
        credit.--For purposes of paragraph (1)(C)--
                  (A) In general.--Research shall be treated as 
                conducted for a purpose described in this 
                paragraph if it relates to--
                          (i) a new or improved function,
                          (ii) performance, or
                          (iii) reliability or quality.
                  (B) Certain purposes not qualified.--Research 
                shall in no event be treated as conducted for a 
                purpose described in this paragraph if it 
                relates to style, taste, cosmetic, or seasonal 
                design factors.
          (4) Activities for which credit not allowed.--The 
        term ``qualified research'' shall not include any of 
        the following:
                  (A) Research after commercial production.--
                Any research conducted after the beginning of 
                commercial production of the business 
                component.
                  (B) Adaptation of existing business 
                components.--Any research related to the 
                adaptation of an existing business component to 
                a particular customer's requirement or need.
                  (C) Duplication of existing business 
                component.--Any research related to the 
                reproduction of an existing business component 
                (in whole or in part) from a physical 
                examination of the business component itself or 
                from plans, blueprints, detailed 
                specifications, or publicly available 
                information with respect to such business 
                component.
                  (D) Surveys, studies, etc..--Any--
                          (i) efficiency survey,
                          (ii) activity relating to management 
                        function or technique,
                          (iii) market research, testing, or 
                        development (including advertising or 
                        promotions),
                          (iv) routine data collection, or
                          (v) routine or ordinary testing or 
                        inspection for quality control.
                  (E) Computer software.--Except to the extent 
                provided in regulations, any research with 
                respect to computer software which is developed 
                by (or for the benefit of) the taxpayer 
                primarily for internal use by the taxpayer, 
                other than for use in--
                          (i) an activity which constitutes 
                        qualified research (determined with 
                        regard to this subparagraph), or
                          (ii) a production process with 
                        respect to which the requirements of 
                        paragraph (1) are met.
                  (F) Foreign research.--Any research conducted 
                outside the United States, the Commonwealth of 
                Puerto Rico, or any possession of the United 
                States.
                  (G) Social sciences, etc..--Any research in 
                the social sciences, arts, or humanities.
                  (H) Funded research.--Any research to the 
                extent funded by any grant, contract, or 
                otherwise by another person (or governmental 
                entity).
  (e) Credit Allowable With Respect to Certain Payments to 
Qualified Organizations for Basic Research.--For purposes of 
this section--
          (1) In general.--In the case of any taxpayer who 
        makes basic research payments for any taxable year--
                  (A) the amount of basic research payments 
                taken into account under subsection (a)(2) 
                shall be equal to the excess of--
                          (i) such basic research payments, 
                        over
                          (ii) the qualified organization base 
                        period amount, and
                  (B) that portion of such basic research 
                payments which does not exceed the qualified 
                organization base period amount shall be 
                treated as contract research expenses for 
                purposes of subsection (a)(1).
          (2) Basic research payments defined.--For purposes of 
        this subsection--
                  (A) 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.
                  (B) Exception to requirement that research be 
                performed by the organization.--In the case of 
                a qualified organization described in 
                subparagraph (C) or (D) of paragraph (6), 
                clause (ii) of subparagraph (A) shall not 
                apply.
          (3) Qualified organization base period amount.--For 
        purposes of this subsection, the term ``qualified 
        organization base period amount'' means an amount equal 
        to the sum of--
                  (A) the minimum basic research amount, plus
                  (B) the maintenance-of-effort amount.
          (4) Minimum basic research amount.--For purposes of 
        this subsection--
                  (A) In general.--The term ``minimum basic 
                research amount'' means an amount equal to the 
                greater of--
                          (i) 1 percent of the average of the 
                        sum of amounts paid or incurred during 
                        the base period for--
                                  (I) any in-house research 
                                expenses, and
                                  (II) any contract research 
                                expenses, or
                          (ii) the amounts treated as contract 
                        research expenses during the base 
                        period by reason of this subsection (as 
                        in effect during the base period).
                  (B) Floor amount.--Except in the case of a 
                taxpayer which was in existence during a 
                taxable year (other than a short taxable year) 
                in the base period, the minimum basic research 
                amount for any base period shall not be less 
                than 50 percent of the basic research payments 
                for the taxable year for which a determination 
                is being made under this subsection.
          (5) Maintenance-of-effort amount.--For purposes of 
        this subsection--
                  (A) In general.--The term ``maintenance-of-
                effort amount'' means, with respect to any 
                taxable year, an amount equal to the excess (if 
                any) of--
                          (i) an amount equal to--
                                  (I) the average of the 
                                nondesignated university 
                                contributions paid by the 
                                taxpayer during the base 
                                period, multiplied by
                                  (II) the cost-of-living 
                                adjustment for the calendar 
                                year in which such taxable year 
                                begins, over (ii) the amount of 
                                nondesignated university 
                                contributions paid by the 
                                taxpayer during such taxable 
                                year.
                  (B) Nondesignated university contributions.--
                For purposes of this paragraph, the term 
                ``nondesignated university contribution'' means 
                any amount paid by a taxpayer to any qualified 
                organization described in paragraph (6)(A)--
                          (i) for which a deduction was 
                        allowable under section 170, and
                          (ii) which was not taken into 
                        account--
                                  (I) in computing the amount 
                                of the credit under this 
                                section (as in effect during 
                                the base period) during any 
                                taxable year in the base 
                                period, or
                                  (II) as a basic research 
                                payment for purposes of this 
                                section.
                  (C) Cost-of-living adjustment defined.--
                          (i) In general.--The cost-of-living 
                        adjustment for any calendar year is the 
                        cost-of-living adjustment for such 
                        calendar year determined under section 
                        1(f)(3), by substituting ``calendar 
                        year 1987'' for ``calendar year 1992'' 
                        in subparagraph (B) thereof.
                          (ii) Special rule where base period 
                        ends in a calendar year other than 1983 
                        or 1984.--If the base period of any 
                        taxpayer does not end in 1983 or 1984, 
                        section 1(f)(3)(B) shall, or purposes 
                        of this paragraph, be applied by 
                        substituting the calendar year in which 
                        such base period ends for 1992. Such 
                        substitution shall be in lieu of the 
                        substitution under clause (i).
          (6) Qualified organization.--For purposes of this 
        subsection, the term ``qualified organization'' means 
        any of the following organizations:
                  (A) 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).
                  (B) Certain scientific research 
                organizations.--Any organization not described 
                in subparagraph (A) 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.
                  (C) Scientific tax-exempt organizations.--Any 
                organization which--
                          (i) is described in--
                                  (I) section 501(c)(3) (other 
                                than a private foundation), or
                                  (II) 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 subparagraph (A) pursuant 
                        to written research agreements, and
                          (iv) currently expends--
                                  (I) substantially all of its 
                                funds, or
                                  (II) substantially all of the 
                                basic research payments 
                                received by it,
                        for grants to, or contracts for basic 
                        research with, an organization 
                        described in subparagraph (A).
                  (D) Certain grant organizations.--Any 
                organization not described in subparagraph (B) 
                or (C) 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 clause (i),
                          (iii) is organized and operated 
                        exclusively for the purpose of making 
                        grants to organizations described in 
                        subparagraph (A) 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).
          (7) Definitions and special rules.--For purposes of 
        this subsection--
                  (A) 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.
                  (B) Base period.--The term ``base period'' 
                means the 3-taxable-year period ending with the 
                taxable year immediately preceding the 1st 
                taxable year of the taxpayer beginning after 
                December 31, 1983.
                  (C) Exclusion from incremental credit 
                calculation.--For purposes of determining the 
                amount of credit allowable under subsection 
                (a)(1) for any taxable year, the amount of the 
                basic research payments taken into account 
                under subsection (a)(2)--
                          (i) shall not be treated as qualified 
                        research expenses under subsection 
                        (a)(1)(A), and
                          (ii) shall not be included in the 
                        computation of base amount under 
                        subsection (a)(1)(B).
                  (D) Trade or business qualification.--For 
                purposes of applying subsection (b)(1) to this 
                subsection, 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 subsection 
                (b)(3)(B)).
                  (E) 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)).
  (f) Special Rules.--For purposes of this section--
          (1) Aggregation of expenditures.--
                  (A) Controlled group of corporations.--In 
                determining the amount of the credit under this 
                section--
                          (i) all members of the same 
                        controlled group of corporations shall 
                        be treated as a single taxpayer, and
                          (ii) the credit (if any) allowable by 
                        this section to each such member shall 
                        be determined on a proportionate basis 
                        to its share of the aggregate of the 
                        qualified research expenses, basic 
                        research payments, and amounts paid or 
                        incurred to energy research 
                        consortiums, taken into account by such 
                        controlled group for purposes of this 
                        section.
                  (B) Common control.--Under regulations 
                prescribed by the Secretary, in determining the 
                amount of the credit under this section--
                          (i) all trades or businesses (whether 
                        or not incorporated) which are under 
                        common control shall be treated as a 
                        single taxpayer, and
                          (ii) the credit (if any) allowable by 
                        this section to each such person shall 
                        be determined on a proportionate basis 
                        to its share of the aggregate of the 
                        qualified research expenses, basic 
                        research payments, and amounts paid or 
                        incurred to energy research 
                        consortiums, taken into account by all 
                        such persons under common control for 
                        purposes of this section.
                The regulations prescribed under this 
                subparagraph shall be based on principles 
                similar to the principles which apply in the 
                case of subparagraph (A).
          (2) Allocations.--
                  (A) Pass-thru in the case of estates and 
                trusts.--Under regulations prescribed by the 
                Secretary, rules similar to the rules of 
                subsection (d) of section 52 shall apply.
                  (B) Allocation in the case of partnerships.--
                In the case of partnerships, the credit shall 
                be allocated among partners under regulations 
                prescribed by the Secretary.
          (3) Adjustments for certain acquisitions, etc..--
        Under regulations prescribed by the Secretary--
                  (A) Acquisitions.--
                          (i) In general.--If a person acquires 
                        the major portion of either a trade or 
                        business or a separate unit of a trade 
                        or business (hereinafter in this 
                        paragraph referred to as the ``acquired 
                        business'') of another person 
                        (hereinafter in this paragraph referred 
                        to as the ``predecessor''), then the 
                        amount of qualified research expenses 
                        paid or incurred by the acquiring 
                        person during the measurement period 
                        shall be increased by the amount 
                        determined under clause (ii), and the 
                        gross receipts of the acquiring person 
                        for such period shall be increased by 
                        the amount determined under clause 
                        (iii).
                          (ii) Amount determined with respect 
                        to qualified research expenses.--The 
                        amount determined under this clause 
                        is--
                                  (I) for purposes of applying 
                                this section for the taxable 
                                year in which such acquisition 
                                is made, the acquisition year 
                                amount, and
                                  (II) for purposes of applying 
                                this section for any taxable 
                                year after the taxable year in 
                                which such acquisition is made, 
                                the qualified research expenses 
                                paid or incurred by the 
                                predecessor with respect to the 
                                acquired business during the 
                                measurement period.
                          (iii) Amount determined with respect 
                        to gross receipts.--The amount 
                        determined under this clause is the 
                        amount which would be determined under 
                        clause (ii) if ``the gross receipts 
                        of'' were substituted for ``the 
                        qualified research expenses paid or 
                        incurred by'' each place it appears in 
                        clauses (ii) and (iv).
                          (iv) Acquisition year amount.--For 
                        purposes of clause (ii), the 
                        acquisition year amount is the amount 
                        equal to the product of--
                                  (I) the qualified research 
                                expenses paid or incurred by 
                                the predecessor with respect to 
                                the acquired business during 
                                the measurement period, and
                                  (II) the number of days in 
                                the period beginning on the 
                                date of the acquisition and 
                                ending on the last day of the 
                                taxable year in which the 
                                acquisition is made,
                        divided by the number of days in the 
                        acquiring person's taxable year.
                          (v) Special rules for coordinating 
                        taxable years.--In the case of an 
                        acquiring person and a predecessor 
                        whose taxable years do not begin on the 
                        same date--
                                  (I) each reference to a 
                                taxable year in clauses (ii) 
                                and (iv) shall refer to the 
                                appropriate taxable year of the 
                                acquiring person,
                                  (II) the qualified research 
                                expenses paid or incurred by 
                                the predecessor, and the gross 
                                receipts of the predecessor, 
                                during each taxable year of the 
                                predecessor any portion of 
                                which is part of the 
                                measurement period shall be 
                                allocated equally among the 
                                days of such taxable year,
                                  (III) the amount of such 
                                qualified research expenses 
                                taken into account under 
                                clauses (ii) and (iv) with 
                                respect to a taxable year of 
                                the acquiring person shall be 
                                equal to the total of the 
                                expenses attributable under 
                                subclause (II) to the days 
                                occurring during such taxable 
                                year, and
                                  (IV) the amount of such gross 
                                receipts taken into account 
                                under clause (iii) with respect 
                                to a taxable year of the 
                                acquiring person shall be equal 
                                to the total of the gross 
                                receipts attributable under 
                                subclause (II) to the days 
                                occurring during such taxable 
                                year.
                          (vi) Measurement period.--For 
                        purposes of this subparagraph, the term 
                        ``measurement period'' means, with 
                        respect to the taxable year of the 
                        acquiring person for which the credit 
                        is determined, any period of the 
                        acquiring person preceding such taxable 
                        year which is taken into account for 
                        purposes of determining the credit for 
                        such year.
                  (B) Dispositions.--If the predecessor 
                furnished to the acquiring person such 
                information as is necessary for the application 
                of subparagraph (A), then, for purposes of 
                applying this section for any taxable year 
                ending after such disposition, the amount of 
                qualified research expenses paid or incurred 
                by, and the gross receipts of, the predecessor 
                during the measurement period (as defined in 
                subparagraph (A)(vi), determined by 
                substituting ``predecessor'' for ``acquiring 
                person'' each place it appears) shall be 
                reduced by--
                          (i) in the case of the taxable year 
                        in which such disposition is made, an 
                        amount equal to the product of--
                                  (I) the qualified research 
                                expenses paid or incurred by, 
                                or gross receipts of, the 
                                predecessor with respect to the 
                                acquired business during the 
                                measurement period (as so 
                                defined and so determined), and
                                  (II) the number of days in 
                                the period beginning on the 
                                date of acquisition (as 
                                determined for purposes of 
                                subparagraph (A)(iv)(II)) and 
                                ending on the last day of the 
                                taxable year of the predecessor 
                                in which the disposition is 
                                made,
                        divided by the number of days in the 
                        taxable year of the predecessor, and
                          (ii) in the case of any taxable year 
                        ending after the taxable year in which 
                        such disposition is made, the amount 
                        described in clause (i)(I).
                  (C) Certain reimbursements taken into account 
                in determining fixed-base percentage.--If 
                during any of the 3 taxable years following the 
                taxable year in which a disposition to which 
                subparagraph (B) applies occurs, the disposing 
                taxpayer (or a person with whom the taxpayer is 
                required to aggregate expenditures under 
                paragraph (1)) reimburses the acquiring person 
                (or a person required to so aggregate 
                expenditures with such person) for research on 
                behalf of the taxpayer, then the amount of 
                qualified research expenses of the taxpayer for 
                the taxable years taken into account in 
                computing the fixed-base percentage shall be 
                increased by the lesser of--
                          (i) the amount of the decrease under 
                        subparagraph (B) which is allocable to 
                        taxable years so taken into account, or
                          (ii) the product of the number of 
                        taxable years so taken into account, 
                        multiplied by the amount of the 
                        reimbursement described in this 
                        subparagraph.
          (4) Short taxable years.--In the case of any short 
        taxable year, qualified research expenses and gross 
        receipts shall be annualized in such circumstances and 
        under such methods as the Secretary may prescribe by 
        regulation.
          (5) Controlled group of corporations.--The term 
        ``controlled group of corporations'' has the same 
        meaning given to such term by section 1563(a), except 
        that--
                  (A) ``more than 50 percent'' shall be 
                substituted for ``at least 80 percent'' each 
                place it appears in section 1563(a)(1), and
                  (B) the determination shall be made without 
                regard to subsections (a)(4) and (e)(3)(C) of 
                section 1563.
          (6) Energy research consortium.--
                  (A) In general.--The term ``energy research 
                consortium'' means any organization--
                          (i) which is--
                                  (I) described in section 
                                501(c)(3) and is exempt from 
                                tax under section 501(a) and is 
                                organized and operated 
                                primarily to conduct energy 
                                research, or
                                  (II) organized and operated 
                                primarily to conduct energy 
                                research in the public interest 
                                (within the meaning of section 
                                501(c)(3)),
                          (ii) which is not a private 
                        foundation,
                          (iii) to which at least 5 unrelated 
                        persons paid or incurred during the 
                        calendar year in which the taxable year 
                        of the organization begins amounts 
                        (including as contributions) to such 
                        organization for energy research, and
                          (iv) to which no single person paid 
                        or incurred (including as 
                        contributions) during such calendar 
                        year an amount equal to more than 50 
                        percent of the total amounts received 
                        by such organization during such 
                        calendar year for energy research.
                  (B) Treatment of persons.--All persons 
                treated as a single employer under subsection 
                (a) or (b) of section 52 shall be treated as 
                related persons for purposes of subparagraph 
                (A)(iii) and as a single person for purposes of 
                subparagraph (A)(iv).
                  (C) Foreign research.--For purposes of 
                subsection (a)(3), amounts paid or incurred for 
                any energy research conducted outside the 
                United States, the Commonwealth of Puerto Rico, 
                or any possession of the United States shall 
                not be taken into account.
                  (D) Denial of double benefit.--Any amount 
                taken into account under subsection (a)(3) 
                shall not be taken into account under paragraph 
                (1) or (2) of subsection (a).
                  (E) Energy research.--The term ``energy 
                research'' does not include any research which 
                is not qualified research.
  (g) Special Rule for Pass-Thru of Credit.--In the case of an 
individual who--
          (1) owns an interest in an unincorporated trade or 
        business,
          (2) is a partner in a partnership,
          (3) is a beneficiary of an estate or trust, or
          (4) is a shareholder in an S corporation,
the amount determined under subsection (a) for any taxable year 
shall not exceed an amount (separately computed with respect to 
such person's interest in such trade or business or entity) 
equal to the amount of tax attributable to that portion of a 
person's taxable income which is allocable or apportionable to 
the person's interest in such trade or business or entity. If 
the amount determined under subsection (a) for any taxable year 
exceeds the limitation of the preceding sentence, such amount 
may be carried to other taxable years under the rules of 
section 39; except that the limitation of the preceding 
sentence shall be taken into account in lieu of the limitation 
of section 38(c) in applying section 39.
  (h) Termination.--
          (1) In general.--This section shall not apply to any 
        amount paid or incurred after December 31, 2014.
          (2) Termination of alternative incremental credit.--
        No election under subsection (c)(4) shall apply to 
        taxable years beginning after December 31, 2008.
          (2)  Computation for taxable year in which credit 
        terminates.--In the case of any taxable year with 
        respect to which this section applies to a number of 
        days which is less than the total number of days in 
        such taxable year--
                  (A) the amount determined under subsection 
                (c)(1)(B) with respect to such taxable year 
                shall be the amount which bears the same ratio 
                to such amount (determined without regard to 
                this paragraph) as the number of days in such 
                taxable year to which this section applies 
                bears to the total number of days in such 
                taxable year, and
                  (B) for purposes of subsection (c)(5), the 
                average qualified research expenses for the 
                preceding 3 taxable years shall be the amount 
                which bears the same ratio to such average 
                qualified research expenses (determined without 
                regard to this paragraph) as the number of days 
                in such taxable year to which this section 
                applies bears to the total number of days in 
                such taxable year.

           *       *       *       *       *       *       *


SEC. 45C. CLINICAL TESTING EXPENSES FOR CERTAIN DRUGS FOR RARE DISEASES 
                    OR CONDITIONS.

  (a) General Rule.--For purposes of section 38, the credit 
determined under this section for the taxable year is an amount 
equal to 50 percent of the qualified clinical testing expenses 
for the taxable year.
  (b) Qualified Clinical Testing Expenses.--For purposes of 
this section--
          (1) Qualified clinical testing expenses.--
                  (A) In general.--Except as otherwise provided 
                in this paragraph, the term ``qualified 
                clinical testing expenses'' means the amounts 
                which are paid or incurred by the taxpayer 
                during the taxable year which would be 
                described in subsection (b) of section 41 if 
                such subsection were applied with the 
                modifications set forth in subparagraph (B).
                  (B) Modifications.--For purposes of 
                subparagraph (A), subsection (b) of section 41 
                shall be applied--
                          (i) by substituting ``clinical 
                        testing'' for ``qualified research'' 
                        each place it appears in paragraphs (2) 
                        and (3) of such subsection, and
                          (ii) by substituting ``100 percent'' 
                        for ``65 percent'' in paragraph (3)(A) 
                        of such subsection.
                  (C) Exclusion for amounts funded by grants, 
                etc.--The term ``qualified clinical testing 
                expenses'' shall not include any amount to the 
                extent such amount is funded by any grant, 
                contract, or otherwise by another person (or 
                any governmental entity).
                  (D) Special rule.--If section 41 is not in 
                effect for any period, such section shall be 
                deemed to remain in effect for such period for 
                purposes of this paragraph.
          (2) Clinical testing.--
                  (A) In general.--The term ``clinical 
                testing'' means any human clinical testing--
                          (i) which is carried out under an 
                        exemption for a drug being tested for a 
                        rare disease or condition under section 
                        505(i) of the Federal Food, Drug, and 
                        Cosmetic Act (or regulations issued 
                        under such section),
                          (ii) which occurs--
                                  (I) after the date such drug 
                                is designated under section 526 
                                of such Act, and
                                  (II) before the date on which 
                                an application with respect to 
                                such drug is approved under 
                                section 505(b) of such Act or, 
                                if the drug is a biological 
                                product, before the date on 
                                which a license for such drug 
                                is issued under section 351 of 
                                the Public Health Service Act; 
                                and
                          (iii) which is conducted by or on 
                        behalf of the taxpayer to whom the 
                        designation under such section 526 
                        applies.
                  (B) Testing must be related to use for rare 
                disease or condition.--Human clinical testing 
                shall be taken into account under subparagraph 
                (A) only to the extent such testing is related 
                to the use of a drug for the rare disease or 
                condition for which it was designated under 
                section 526 of the Federal Food, Drug, and 
                Cosmetic Act.
  (c) Coordination With Credit for Increasing Research 
Expenditures.--
          (1) In general.--Except as provided in paragraph (2), 
        any qualified clinical testing expenses for a taxable 
        year to which an election under this section applies 
        shall not be taken into account for purposes of 
        determining the credit allowable under section 41 for 
        such taxable year.
          (2) Expenses included in determining base period 
        research expenses.--Any qualified clinical testing 
        expenses for any taxable year which are qualified 
        research expenses (within the meaning of section 41(b)) 
        shall be taken into account in determining base period 
        research expenses for purposes of applying section 41 
        to subsequent taxable years.
  (d) Definition and Special Rules.--
          (1) Rare disease or condition.--For purposes of this 
        section, the term ``rare disease or condition'' means 
        any disease or condition which--
                  (A) affects less than 200,000 persons in the 
                United States, or
                  (B) affects more than 200,000 persons in the 
                United States but for which there is no 
                reasonable expectation that the cost of 
                developing and making available in the United 
                States a drug for such disease or condition 
                will be recovered from sales in the United 
                States of such drug.
        Determinations under the preceding sentence with 
        respect to any drug shall be made on the basis of the 
        facts and circumstances as of the date such drug is 
        designated under section 526 of the Federal Food, Drug, 
        and Cosmetic Act.
          (2) Special limitations on foreign testing.--
                  (A) In general.--No credit shall be allowed 
                under this section with respect to any clinical 
                testing conducted outside the United States 
                unless--
                          (i) such testing is conducted outside 
                        the United States because there is an 
                        insufficient testing population in the 
                        United States, and
                          (ii) such testing is conducted by a 
                        United States person or by any other 
                        person who is not related to the 
                        taxpayer to whom the designation under 
                        section 526 of the Federal Food, Drug, 
                        and Cosmetic Act applies.
                  (B) Special limitation for corporations to 
                which section 936 applies.--No credit shall be 
                allowed under this section with respect to any 
                clinical testing conducted by a corporation to 
                which an election under section 936 applies.
          (3) Certain rules made applicable.--Rules similar to 
        the rules of paragraphs (1) and (2) of section 41(f) 
        shall apply for purposes of this section.
          (4) Election.--This section shall apply to any 
        taxpayer for any taxable year only if such taxpayer 
        elects (at such time and in such manner as the 
        Secretary may by regulations prescribe) to have this 
        section apply for such taxable year.

           *       *       *       *       *       *       *


Subchapter B--Computation of Taxable Income

           *       *       *       *       *       *       *


PART IX--ITEMS NOT DEDUCTIBLE

           *       *       *       *       *       *       *



SEC. 280C. CERTAIN EXPENSES FOR WHICH CREDITS ARE ALLOWABLE.

  (a) Rule for Employment Credits.--No deduction shall be 
allowed for that portion of the wages or salaries paid or 
incurred for the taxable year which is equal to the sum of the 
credits determined for the taxable year under sections 45A(a), 
45P(a), 51(a), and 1396(a), 1400P(b), and 1400R. In the case of 
a corporation which is a member of a controlled group of 
corporations (within the meaning of section 52(a)) or a trade 
or business which is treated as being under common control with 
other trades or businesses (within the meaning of section 
52(b)), this subsection shall be applied under rules prescribed 
by the Secretary similar to the rules applicable under 
subsections (a) and (b) of section 52.
  (b) Credit for Qualified Clinical Testing Expenses for 
Certain Drugs.--
          (1) In general.--No deduction shall be allowed for 
        that portion of the qualified clinical testing expenses 
        (as defined in section 45C(b)) otherwise allowable as a 
        deduction for the taxable year which is equal to the 
        amount of the credit allowable for the taxable year 
        under section 45C (determined without regard to section 
        38(c)).
          (2) Similar rule where taxpayer capitalizes rather 
        than deducts expenses.--If--
                  (A) the amount of the credit allowable for 
                the taxable year under section 45C (determined 
                without regard to section 38(c)), exceeds
                  (B) the amount allowable as a deduction for 
                the taxable year for qualified clinical testing 
                expenses (determined without regard to 
                paragraph (1)),
        the amount chargeable to capital account for the 
        taxable year for such expenses shall be reduced by the 
        amount of such excess.
          (3) Controlled groups.--In the case of a corporation 
        which is a member of a controlled group of corporations 
        (within the meaning of section 41(f)(5)) or a trade or 
        business which is treated as being under common control 
        with other trades or business (within the meaning of 
        section 41(f)(1)(B)), this subsection shall be applied 
        under rules prescribed by the Secretary similar to the 
        rules applicable under subparagraphs (A) and (B) of 
        section 41(f)(1).
  (c) Credit for Increasing Research Activities.--
          (1) In general.--No deduction shall be allowed for 
        that portion of the qualified research expenses (as 
        defined in section 41(b)) or basic research expenses 
        (as defined in section 41(e)(2)) otherwise allowable as 
        a deduction for the taxable year which is equal to the 
        amount of the credit determined for such taxable year 
        under section 41(a).
          (2) Similar rule where taxpayer capitalizes rather 
        than deducts expenses.--If--
                  (A) the amount of the credit determined for 
                the taxable year under section 41(a)(1), 
                exceeds
                  (B) the amount allowable as a deduction for 
                such taxable year for qualified research 
                expenses or basic research expenses (determined 
                without regard to paragraph (1)),
        the amount chargeable to capital account for the 
        taxable year for such expenses shall be reduced by the 
        amount of such excess.
          (3) Election of reduced credit.--
                  (A) In general.--In the case of any taxable 
                year for which an election is made under this 
                paragraph--
                          (i) paragraphs (1) and (2) shall not 
                        apply, and
                          (ii) the amount of the credit under 
                        section 41(a) shall be the amount 
                        determined under subparagraph (B).
                  (B) Amount of reduced credit.--The amount of 
                credit determined under this subparagraph for 
                any taxable year shall be the amount equal to 
                the excess of--
                          (i) the amount of credit determined 
                        under section 41(a) without regard to 
                        this paragraph, over
                          (ii) the product of--
                                  (I) the amount described in 
                                clause (i), and
                                  (II) the maximum rate of tax 
                                under section 11(b)(1).
                  (C) Election.--An election under this 
                paragraph for any taxable year shall be made 
                not later than the time for filing the return 
                of tax for such year (including extensions), 
                shall be made on such return, and shall be made 
                in such manner as the Secretary may prescribe. 
                Such an election, once made, shall be 
                irrevocable.
          (4) Controlled groups.--Paragraph (3) of subsection 
        (b) shall apply for purposes of this subsection.
  (d) Credit for Low Sulfur Diesel Fuel Production.--The 
deductions otherwise allowed under this chapter for the taxable 
year shall be reduced by the amount of the credit determined 
for the taxable year under section 45H(a).
  (e) Mine Rescue Team Training Credit.--No deduction shall be 
allowed for that portion of the expenses otherwise allowable as 
a deduction for the taxable year which is equal to the amount 
of the credit determined for the taxable year under section 
45N(a).
  (f) Credit for Security of Agricultural Chemicals.--No 
deduction shall be allowed for that portion of the expenses 
otherwise allowable as a deduction taken into account in 
determining the credit under section 45O for the taxable year 
which is equal to the amount of the credit determined for such 
taxable year under section 45O(a).
  (g)  Credit for Health Insurance Premiums.--
   No deduction shall be allowed for the portion of the 
premiums paid by the taxpayer for coverage of 1 or more 
individuals under a qualified health plan which is equal to the 
amount of the credit determined for the taxable year under 
section 36B(a) with respect to such premiums.
  (h) Credit for Employee Health Insurance Expenses of Small 
Employers.--No deduction shall be allowed for that portion of 
the premiums for qualified health plans (as defined in section 
1301(a) of the Patient Protection and Affordable Care Act), or 
for health insurance coverage in the case of taxable years 
beginning in 2010, 2011, 2012, or 2013, paid by an employer 
which is equal to the amount of the credit determined under 
section 45R(a) with respect to the premiums.
  (g)  Qualifying Therapeutic Discovery Project Credit.--
          (1) In general.--No deduction shall be allowed for 
        that portion of the qualified investment (as defined in 
        section 48D(b)) otherwise allowable as a deduction for 
        the taxable year which--
                  (A) would be qualified research expenses (as 
                defined in section 41(b)), basic research 
                expenses (as defined in section 41(e)(2)), or 
                qualified clinical testing expenses (as defined 
                in section 45C(b)) if the credit under section 
                41 or section 45C were allowed with respect to 
                such expenses for such taxable year, and
                  (B) is equal to the amount of the credit 
                determined for such taxable year under section 
                48D(a), reduced by--
                          (i) the amount disallowed as a 
                        deduction by reason of section 
                        48D(e)(2)(B), and
                          (ii) the amount of any basis 
                        reduction under section 48D(e)(1).
          (2) Similar rule where taxpayer capitalizes rather 
        than deducts expenses.--In the case of expenses 
        described in paragraph (1)(A) taken into account in 
        determining the credit under section 48D for the 
        taxable year, if--
                  (A) the amount of the portion of the credit 
                determined under such section with respect to 
                such expenses, exceeds
                  (B) the amount allowable as a deduction for 
                such taxable year for such expenses (determined 
                without regard to paragraph (1)),
        the amount chargeable to capital account for the 
        taxable year for such expenses shall be reduced by the 
        amount of such excess.
          (3) Controlled groups.--Paragraph (3) of subsection 
        (b) shall apply for purposes of this subsection.

           *       *       *       *       *       *       *


      B. Changes in Existing Law Proposed by the Bill, as Reported

    In compliance with clause 3(e)(1)(B) of rule XIII of the 
Rules of the House of Representatives, changes in existing law 
proposed by the bill, as reported, are shown as follows 
(existing law proposed to be omitted is enclosed in black 
brackets, new matter is printed in italic, existing law in 
which no change is proposed is shown in roman):

INTERNAL REVENUE CODE OF 1986

           *       *       *       *       *       *       *



Subtitle A--Income Taxes

           *       *       *       *       *       *       *


CHAPTER 1--NORMAL TAXES AND SURTAXES

           *       *       *       *       *       *       *


Subchapter A--Determination of Tax Liability

           *       *       *       *       *       *       *


PART IV--CREDITS AGAINST TAX

           *       *       *       *       *       *       *



Subpart D--Business Related Credits

           *       *       *       *       *       *       *



SEC. 38. GENERAL BUSINESS CREDIT.

  (a) Allowance of Credit.--There shall be allowed as a credit 
against the tax imposed by this chapter for the taxable year an 
amount equal to the sum of--
          (1) the business credit carryforwards carried to such 
        taxable year,
          (2) the amount of the current year business credit, 
        plus
          (3) the business credit carrybacks carried to such 
        taxable year.
  (b) Current Year Business Credit.--For purposes of this 
subpart, the amount of the current year business credit is the 
sum of the following credits determined for the taxable year:
          (1) the investment credit determined under section 
        46,
          (2) the work opportunity credit determined under 
        section 51(a),
          (3) the alcohol fuels credit determined under section 
        40(a),
          (4) the research credit determined under section 
        41(a),
          (5) the low-income housing credit determined under 
        section 42(a),
          (6) the enhanced oil recovery credit under section 
        43(a),
          (7) in the case of an eligible small business (as 
        defined in section 44(b)), the disabled access credit 
        determined under section 44(a),
          (8) the renewable electricity production credit under 
        section 45(a),
          (9) the empowerment zone employment credit determined 
        under section 1396(a),
          (10) the Indian employment credit as determined under 
        section 45A(a),
          (11) the employer social security credit determined 
        under section 45B(a),
          (12) the orphan drug credit determined under section 
        45C(a),
          (13) the new markets tax credit determined under 
        section 45D(a),
          (14) in the case of an eligible employer (as defined 
        in section 45E(c)), the small employer pension plan 
        startup cost credit determined under section 45E(a),
          (15) the employer-provided child care credit 
        determined under section 45F(a),
          (16) the railroad track maintenance credit determined 
        under section 45G(a),
          (17) the biodiesel fuels credit determined under 
        section 40A(a),
          (18) the low sulfur diesel fuel production credit 
        determined under section 45H(a),
          (19) the marginal oil and gas well production credit 
        determined under section 45I(a),
          (20) the distilled spirits credit determined under 
        section 5011(a),
          (21) the advanced nuclear power facility production 
        credit determined under section 45J(a),
          (22) the nonconventional source production credit 
        determined under section 45K(a),
          (23) the new energy efficient home credit determined 
        under section 45L(a),
          (24) the energy efficient appliance credit determined 
        under section 45M(a),
          (25) the portion of the alternative motor vehicle 
        credit to which section 30B(g)(1) applies,
          (26) the portion of the alternative fuel vehicle 
        refueling property credit to which section 30C(d)(1) 
        applies,
          (27) the Hurricane Katrina housing credit determined 
        under section 1400P(b),
          (28) the Hurricane Katrina employee retention credit 
        determined under section 1400R(a),
          (29) the Hurricane Rita employee retention credit 
        determined under section 1400R(b),
          (30) the Hurricane Wilma employee retention credit 
        determined under section 1400R(c),
          (31) the mine rescue team training credit determined 
        under section 45N(a),
          (32) in the case of an eligible agricultural business 
        (as defined in section 45O(e)), the agricultural 
        chemicals security credit determined under section 
        45O(a),
          (33) the differential wage payment credit determined 
        under section 45P(a),
          (34) the carbon dioxide sequestration credit 
        determined under section 45Q(a)
          (35) the portion of the new qualified plug-in 
        electric drive motor vehicle credit to which section 
        30D(c)(1) applies, plus
          (36) the small employer health insurance credit 
        determined under section 45R.
  (c) Limitation Based on Amount of Tax.--
          (1) In general.--The credit allowed under subsection 
        (a) for any taxable year shall not exceed the excess 
        (if any) of the taxpayer's net income tax over the 
        greater of--
                  (A) the tentative minimum tax for the taxable 
                year, or
                  (B) 25 percent of so much of the taxpayer's 
                net regular tax liability as exceeds $25,000.
        For purposes of the preceding sentence, the term ``net 
        income tax'' means the sum of the regular tax liability 
        and the tax imposed by section 55, reduced by the 
        credits allowable under subparts A and B of this part, 
        and the term ``net regular tax liability'' means the 
        regular tax liability reduced by the sum of the credits 
        allowable under subparts A and B of this part.
          (2) Empowerment zone employment credit may offset 25 
        percent of minimum tax.--
                  (A) In general.--In the case of the 
                empowerment zone employment credit--
                          (i) this section and section 39 shall 
                        be applied separately with respect to 
                        such credit, and
                          (ii) for purposes of applying 
                        paragraph (1) to such credit--
                                  (I) 75 percent of the 
                                tentative minimum tax shall be 
                                substituted for the tentative 
                                minimum tax under subparagraph 
                                (A) thereof, and
                                  (II) the limitation under 
                                paragraph (1) (as modified by 
                                subclause (I)) shall be reduced 
                                by the credit allowed under 
                                subsection (a) for the taxable 
                                year (other than the 
                                empowerment zone employment 
                                credit, the New York Liberty 
                                Zone business employee credit, 
                                the eligible small business 
                                credits, and the specified 
                                credits).
                  (B) Empowerment zone employment credit.--For 
                purposes of this paragraph, the term 
                ``empowerment zone employment credit'' means 
                the portion of the credit under subsection (a) 
                which is attributable to the credit determined 
                under section 1396 (relating to empowerment 
                zone employment credit).
          (3) Special rules for new york liberty zone business 
        employee credit.--
                  (A) In general.--In the case of the New York 
                Liberty Zone business employee credit--
                          (i) this section and section 39 shall 
                        be applied separately with respect to 
                        such credit, and
                          (ii) in applying paragraph (1) to 
                        such credit--
                                  (I) the tentative minimum tax 
                                shall be treated as being zero, 
                                and
                                  (II) the limitation under 
                                paragraph (1) (as modified by 
                                subclause (I)) shall be reduced 
                                by the credit allowed under 
                                subsection (a) for the taxable 
                                year (other than the New York 
                                Liberty Zone business employee 
                                credit, the eligible small 
                                business credits, and the 
                                specified credits).
                  (B) new york liberty zone business employee 
                credit.--For purposes of this subsection, the 
                term ``New York Liberty Zone business employee 
                credit'' means the portion of work opportunity 
                credit under section 51 determined under 
                section 1400L(a).
          (4) Special rules for specified credits.--
                  (A) In general.--In the case of specified 
                credits--
                          (i) this section and section 39 shall 
                        be applied separately with respect to 
                        such credits, and
                          (ii) in applying paragraph (1) to 
                        such credits--
                                  (I) the tentative minimum tax 
                                shall be treated as being zero, 
                                and
                                  (II) the limitation under 
                                paragraph (1) (as modified by 
                                subclause (I)) shall be reduced 
                                by the credit allowed under 
                                subsection (a) for the taxable 
                                year (other than the eligible 
                                small business credits and the 
                                specified credits).
                  (B) Specified credits.--For purposes of this 
                subsection, the term ``specified credits'' 
                means--
                          (i) for taxable years beginning after 
                        December 31, 2004, the credit 
                        determined under section 40,
                          (ii) the credit determined under 
                        section 41 for the taxable year with 
                        respect to an eligible small business 
                        (as defined in paragraph (5)(C), after 
                        application of rules similar to the 
                        rules of paragraph (5)(D)),
                          [(ii)] (iii) the credit determined 
                        under section 42 to the extent 
                        attributable to buildings placed in 
                        service after December 31, 2007,
                          [(iii)] (iv) the credit determined 
                        under section 45 to the extent that 
                        such credit is attributable to 
                        electricity or refined coal produced--
                                  (I) at a facility which is 
                                originally placed in service 
                                after the date of the enactment 
                                of this paragraph, and
                                  (II) during the 4-year period 
                                beginning on the date that such 
                                facility was originally placed 
                                in service,
                          [(iv)] (v) the credit determined 
                        under section 45B,
                          [(v)] (vi) the credit determined 
                        under section 45G,
                          [(vi)] (vii) the credit determined 
                        under section 45R,
                          [(vii)] (viii) the credit determined 
                        under section 46 to the extent that 
                        such credit is attributable to the 
                        energy credit determined under section 
                        48,
                          [(viii)] (ix) the credit determined 
                        under section 46 to the extent that 
                        such credit is attributable to the 
                        rehabilitation credit under section 47, 
                        but only with respect to qualified 
                        rehabilitation expenditures properly 
                        taken into account for periods after 
                        December 31, 2007, and
                          [(ix)] (x) the credit determined 
                        under section 51.
          (5) Special rules for eligible small business credits 
        in 2010.--
                  (A) In general.--In the case of eligible 
                small business credits determined in taxable 
                years beginning in 2010--
                          (i) this section and section 39 shall 
                        be applied separately with respect to 
                        such credits, and
                          (ii) in applying paragraph (1) to 
                        such credits--
                                  (I) the tentative minimum tax 
                                shall be treated as being zero, 
                                and
                                  (II) the limitation under 
                                paragraph (1) (as modified by 
                                subclause (I)) shall be reduced 
                                by the credit allowed under 
                                subsection (a) for the taxable 
                                year (other than the eligible 
                                small business credits).
                  (B) Eligible small business credits.--For 
                purposes of this subsection, the term 
                ``eligible small business credits'' means the 
                sum of the credits listed in subsection (b) 
                which are determined for the taxable year with 
                respect to an eligible small business. Such 
                credits shall not be taken into account under 
                paragraph (2), (3), or (4).
                  (C) Eligible small business.--For purposes of 
                this subsection, the term ``eligible small 
                business'' means, with respect to any taxable 
                year--
                          (i) a corporation the stock of which 
                        is not publicly traded,
                          (ii) a partnership, or
                          (iii) a sole proprietorship, if the 
                        average annual gross receipts of such 
                        corporation, partnership, or sole 
                        proprietorship for the 3-taxable-year 
                        period preceding such taxable year does 
                        not exceed $50,000,000. For purposes of 
                        applying the test under the preceding 
                        sentence, rules similar to the rules of 
                        paragraphs (2) and (3) of section 
                        448(c) shall apply.
                  (D) Treatment of partners and S corporation 
                shareholders.--Credits determined with respect 
                to a partnership or S corporation shall not be 
                treated as eligible small business credits by 
                any partner or shareholder unless such partner 
                or shareholder meets the gross receipts test 
                under subparagraph (C) for the taxable year in 
                which such credits are treated as current year 
                business credits.
          (6) Special rules.--
                  (A) Married individuals.--In the case of a 
                husband or wife who files a separate return, 
                the amount specified under subparagraph (B) of 
                paragraph (1) shall be $12,500 in lieu of 
                $25,000. This subparagraph shall not apply if 
                the spouse of the taxpayer has no business 
                credit carryforward or carryback to, and has no 
                current year business credit for, the taxable 
                year of such spouse which ends within or with 
                the taxpayer's taxable year.
                  (B) Controlled groups.--In the case of a 
                controlled group, the $25,000 amount specified 
                under subparagraph (B) of paragraph (1) shall 
                be reduced for each component member of such 
                group by apportioning $25,000 among the 
                component members of such group in such manner 
                as the Secretary shall by regulations 
                prescribe. For purposes of the preceding 
                sentence, the term ``controlled group'' has the 
                meaning given to such term by section 1563(a).
                  (C) Limitations with respect to certain 
                persons.--In the case of a person described in 
                subparagraph (A) or (B) of section 46(e)(1) (as 
                in effect on the day before the date of the 
                enactment of the Revenue Reconciliation Act of 
                1990), the $25,000 amount specified under 
                subparagraph (B) of paragraph (1) shall equal 
                such person's ratable share (as determined 
                under section 46(e)(2) (as so in effect) of 
                such amount.
                  (D) Estates and trusts.--In the case of an 
                estate or trust, the $25,000 amount specified 
                under subparagraph (B) of paragraph (1) shall 
                be reduced to an amount which bears the same 
                ratio to $25,000 as the portion of the income 
                of the estate or trust which is not allocated 
                to beneficiaries bears to the total income of 
                the estate or trust.
  (d) Ordering Rules.--For purposes of any provision of this 
title where it is necessary to ascertain the extent to which 
the credits determined under any section referred to in 
subsection (b) are used in a taxable year or as a carryback or 
carryforward--
          (1) In general.--The order in which such credits are 
        used shall be determined on the basis of the order in 
        which they are listed in subsection (b) as of the close 
        of the taxable year in which the credit is used.
          (2) Components of investment credit.--The order in 
        which the credits listed in section 46 are used shall 
        be determined on the basis of the order in which such 
        credits are listed in section 46 as of the close of the 
        taxable year in which the credit is used.

           *       *       *       *       *       *       *


SEC. 41. CREDIT FOR INCREASING RESEARCH ACTIVITIES.

  [(a) General Rule.--For purposes of section 38, the research 
credit determined under this section for the taxable year shall 
be an amount equal to the sum of--
          [(1) 20 percent of the excess (if any) of--
                  [(A) the qualified research expenses for the 
                taxable year, over
                  [(B) the base amount,
          [(2) 20 percent of the basic research payments 
        determined under subsection (e)(1)(A), and
          [(3) 20 percent of the amounts paid or incurred by 
        the taxpayer in carrying on any trade or business of 
        the taxpayer during the taxable year (including as 
        contributions) to an energy research consortium for 
        energy research.]
  (a) In General.--For purposes of section 38, the research 
credit determined under this section for the taxable year shall 
be an amount equal to the sum of--
          (1) 20 percent of so much of the qualified research 
        expenses for the 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) 20 percent of so much of the basic research 
        payments for the taxable year as exceeds 50 percent of 
        the average basic research payments for the 3 taxable 
        years preceding the taxable year for which the credit 
        is being determined, plus
          (3) 20 percent of the amounts paid or incurred by the 
        taxpayer in carrying on any trade or business of the 
        taxpayer during the taxable year (including as 
        contributions) to an energy research consortium for 
        energy research.
  (b) Qualified Research Expenses.--For purposes of this 
section--
          (1) Qualified research expenses.--The term 
        ``qualified research expenses'' means the sum of the 
        following amounts which are paid or incurred by the 
        taxpayer during the taxable year in carrying on any 
        trade or business of the taxpayer--
                  (A) in-house research expenses, and
                  (B) contract research expenses.
          (2) In-house research expenses.--
                  (A) In general.--The term ``in-house research 
                expenses'' means--
                          (i) any wages paid or incurred to an 
                        employee for qualified services 
                        performed by such employee,
                          (ii) any amount paid or incurred for 
                        supplies used in the conduct of 
                        qualified research, and
                          (iii) under regulations prescribed by 
                        the Secretary, any amount paid or 
                        incurred to another person for the 
                        right to use computers in the conduct 
                        of qualified research.
                Clause (iii) shall not apply to any amount to 
                the extent that the taxpayer (or any person 
                with whom the taxpayer must aggregate 
                expenditures under subsection (f)(1)) receives 
                or accrues any amount from any other person for 
                the right to use substantially identical 
                personal property.
                  (B) Qualified services.--The term ``qualified 
                services'' means services consisting of--
                          (i) engaging in qualified research, 
                        or
                          (ii) engaging in the direct 
                        supervision or direct support of 
                        research activities which constitute 
                        qualified research.
                If substantially all of the services performed 
                by an individual for the taxpayer during the 
                taxable year consists of services meeting the 
                requirements of clause (i) or (ii), the term 
                ``qualified services'' means all of the 
                services performed by such individual for the 
                taxpayer during the taxable year.
                  (C) Supplies.--The term ``supplies'' means 
                any tangible property other than--
                          (i) land or improvements to land, and
                          (ii) property of a character subject 
                        to the allowance for depreciation.
                  (D) Wages.--
                          (i) In general.--The term ``wages'' 
                        has the meaning given such term by 
                        section 3401(a).
                          (ii) Self-employed individuals and 
                        owner-employees.--In the case of an 
                        employee (within the meaning of section 
                        401(c)(1)), the term ``wages'' includes 
                        the earned income (as defined in 
                        section 401(c)(2)) of such employee.
                          (iii) Exclusion for wages to which 
                        work opportunity credit applies.--The 
                        term ``wages'' shall not include any 
                        amount taken into account in 
                        determining the work opportunity credit 
                        under section 51(a).
          (3) Contract research expenses.--
                  (A) In general.--The term ``contract research 
                expenses'' means 65 percent of any amount paid 
                or incurred by the taxpayer to any person 
                (other than an employee of the taxpayer) for 
                qualified research.
                  (B) Prepaid amounts.--If any contract 
                research expenses paid or incurred during any 
                taxable year are attributable to qualified 
                research to be conducted after the close of 
                such taxable year, such amount shall be treated 
                as paid or incurred during the period during 
                which the qualified research is conducted.
                  (C) Amounts paid to certain research 
                consortia.--
                          (i) In general.--Subparagraph (A) 
                        shall be applied by substituting ``75 
                        percent'' for ``65 percent'' with 
                        respect to amounts paid or incurred by 
                        the taxpayer to a qualified research 
                        consortium for qualified research on 
                        behalf of the taxpayer and 1 or more 
                        unrelated taxpayers. For purposes of 
                        the preceding sentence, all persons 
                        treated as a single employer under 
                        subsection (a) or (b) of section 52 
                        shall be treated as related taxpayers.
                          (ii) Qualified research consortium.--
                        The term ``qualified research 
                        consortium'' means any organization 
                        which--
                                  (I) is described in section 
                                501(c)(3) or 501(c)(6) 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.
                  (D) Amounts paid to eligible small 
                businesses, universities, and Federal 
                laboratories.--
                          (i) In general.--In the case of 
                        amounts paid by the taxpayer to--
                                  (I) an eligible small 
                                business,
                                  (II) an institution of higher 
                                education (as defined in 
                                section 3304(f)), or
                                  (III) an organization which 
                                is a Federal laboratory,
                        for qualified research which is energy 
                        research, subparagraph (A) shall be 
                        applied by substituting ``100 percent'' 
                        for ``65 percent''.
                          (ii) Eligible small business.--For 
                        purposes of this subparagraph, the term 
                        ``eligible small business'' means a 
                        small business with respect to which 
                        the taxpayer does not own (within the 
                        meaning of section 318) 50 percent or 
                        more of--
                                  (I) in the case of a 
                                corporation, the outstanding 
                                stock of the corporation 
                                (either by vote or value), and
                                  (II) in the case of a small 
                                business which is not a 
                                corporation, the capital and 
                                profits interests of the small 
                                business.
                          (iii) Small business.--For purposes 
                        of this subparagraph--
                                  (I) In general.--The term 
                                ``small business'' means, with 
                                respect to any calendar year, 
                                any person if the annual 
                                average number of employees 
                                employed by such person during 
                                either of the 2 preceding 
                                calendar years was 500 or 
                                fewer. For purposes of the 
                                preceding sentence, a preceding 
                                calendar year may be taken into 
                                account only if the person was 
                                in existence throughout the 
                                year.
                                  (II) Startups, controlled 
                                groups, and predecessors.--
                                Rules similar to the rules of 
                                subparagraphs (B) and (D) of 
                                section 220(c)(4) shall apply 
                                for purposes of this clause.
                          (iv) Federal laboratory.--For 
                        purposes of this subparagraph, the term 
                        ``Federal laboratory'' has the meaning 
                        given such term by section 4(6) of the 
                        Stevenson-Wydler Technology Innovation 
                        Act of 1980 (15 U.S.C. 3703(6)), as in 
                        effect on the date of the enactment of 
                        the Energy Tax Incentives Act of 2005.
          (4) Trade or business requirement disregarded for in-
        house research expenses of certain startup ventures.--
        In the case of in-house research expenses, a taxpayer 
        shall be treated as meeting the trade or business 
        requirement of paragraph (1) if, at the time such in-
        house research expenses are paid or incurred, the 
        principal purpose of the taxpayer in making such 
        expenditures is to use the results of the research in 
        the active conduct of a future trade or business--
                  (A) of the taxpayer, or
                  (B) of 1 or more other persons who with the 
                taxpayer are treated as a single taxpayer under 
                subsection (f)(1).
  [(c) Base Amount.--
          [(1) In general.--The term ``base amount'' means the 
        product of--
                  [(A) the fixed-base percentage, and
                  [(B) the average annual gross receipts of the 
                taxpayer for the 4 taxable years preceding the 
                taxable year for which the credit is being 
                determined (hereinafter in this subsection 
                referred to as the ``credit year'').
          [(2) Minimum base amount.--In no event shall the base 
        amount be less than 50 percent of the qualified 
        research expenses for the credit year.
          [(3) Fixed-base percentage.--
                  [(A) In general.--Except as otherwise 
                provided in this paragraph, the fixed-base 
                percentage is the percentage which the 
                aggregate qualified research expenses of the 
                taxpayer for taxable years beginning after 
                December 31, 1983, and before January 1, 1989, 
                is of the aggregate gross receipts of the 
                taxpayer for such taxable years.
                  [(B) Start-up companies.--
                          [(i) Taxpayers to which subparagraph 
                        applies.--The fixed-base percentage 
                        shall be determined under this 
                        subparagraph if--
                                  [(I) the first taxable year 
                                in which a taxpayer had both 
                                gross receipts and qualified 
                                research expenses begins after 
                                December 31, 1983, or
                                  [(II) there are fewer than 3 
                                taxable years beginning after 
                                December 31, 1983, and before 
                                January 1, 1989, in which the 
                                taxpayer had both gross 
                                receipts and qualified research 
                                expenses.
                          [(ii) Fixed-base percentage.--In a 
                        case to which this subparagraph 
                        applies, the fixed-base percentage is--
                                  [(I) 3 percent for each of 
                                the taxpayer's 1st 5 taxable 
                                years beginning after December 
                                31, 1993, for which the 
                                taxpayer has qualified research 
                                expenses,
                                  [(II) in the case of the 
                                taxpayer's 6th such taxable 
                                year, 1/6 of the percentage 
                                which the aggregate qualified 
                                research expenses of the 
                                taxpayer for the 4th and 5th 
                                such taxable years is of the 
                                aggregate gross receipts of the 
                                taxpayer for such years,
                                  [(III) in the case of the 
                                taxpayer's 7th such taxable 
                                year, 1/3 of the percentage 
                                which the aggregate qualified 
                                research expenses of the 
                                taxpayer for the 5th and 6th 
                                such taxable years is of the 
                                aggregate gross receipts of the 
                                taxpayer for such years,
                                  [(IV) in the case of the 
                                taxpayer's 8th such taxable 
                                year, 1/2 of the percentage 
                                which the aggregate qualified 
                                research expenses of the 
                                taxpayer for the 5th, 6th, and 
                                7th such taxable years is of 
                                the aggregate gross receipts of 
                                the taxpayer for such years,
                                  [(V) in the case of the 
                                taxpayer's 9th such taxable 
                                year, 2/3 of the percentage 
                                which the aggregate qualified 
                                research expenses of the 
                                taxpayer for the 5th, 6th, 7th, 
                                and 8th such taxable years is 
                                of the aggregate gross receipts 
                                of the taxpayer for such years,
                                  [(VI) in the case of the 
                                taxpayer's 10th such taxable 
                                year, 5/6 of the percentage 
                                which the aggregate qualified 
                                research expenses of the 
                                taxpayer for the 5th, 6th, 7th, 
                                8th, and 9th such taxable years 
                                is of the aggregate gross 
                                receipts of the taxpayer for 
                                such years, and
                                  [(VII) for taxable years 
                                thereafter, the percentage 
                                which the aggregate qualified 
                                research expenses for any 5 
                                taxable years selected by the 
                                taxpayer from among the 5th 
                                through the 10th such taxable 
                                years is of the aggregate gross 
                                receipts of the taxpayer for 
                                such selected years.
                          [(iii) Treatment of de minimis 
                        amounts of gross receipts and qualified 
                        research expenses.--The Secretary may 
                        prescribe regulations providing that de 
                        minimis amounts of gross receipts and 
                        qualified research expenses shall be 
                        disregarded under clauses (i) and (ii).
                  [(C) Maximum fixed-base percentage.--In no 
                event shall the fixed-base percentage exceed 16 
                percent.
                  [(D) Rounding.--The percentages determined 
                under subparagraphs (A) and (B)(ii) shall be 
                rounded to the nearest 1/100th of 1 percent.
          [(4) Election of alternative incremental credit.--
                  [(A) In general.--At the election of the 
                taxpayer, the credit determined under 
                subsection (a)(1) shall be equal to the sum 
                of--
                          [(i) 3 percent of so much of the 
                        qualified research expenses for the 
                        taxable year as exceeds 1 percent of 
                        the average described in subsection 
                        (c)(1)(B) but does not exceed 1.5 
                        percent of such average,
                          [(ii) 4 percent of so much of such 
                        expenses as exceeds 1.5 percent of such 
                        average but does not exceed 2 percent 
                        of such average, and
                          [(iii) 5 percent of so much of such 
                        expenses as exceeds 2 percent of such 
                        average.
                  [(B) Election.--An election under this 
                paragraph shall apply to the taxable year for 
                which made and all succeeding taxable years 
                unless revoked with the consent of the 
                Secretary.
          [(5) Election of alternative simplified credit.--
                  [(A) In general.--At the election of the 
                taxpayer, the credit determined under 
                subsection (a)(1) shall be equal to 14 percent 
                (12 percent in the case of taxable years ending 
                before January 1, 2009) of so much of the 
                qualified research expenses for the 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.
                  [(B) Special rule in case of no qualified 
                research expenses in any of 3 preceding taxable 
                years.--
                          [(i) Taxpayers to which subparagraph 
                        applies.--The credit under this 
                        paragraph shall be determined under 
                        this subparagraph if the taxpayer has 
                        no qualified research expenses in any 
                        one of the 3 taxable years preceding 
                        the taxable year for which the credit 
                        is being determined.
                          [(ii) Credit rate.--The credit 
                        determined under this subparagraph 
                        shall be equal to 6 percent of the 
                        qualified research expenses for the 
                        taxable year.
                  [(C) Election.--An election under this 
                paragraph shall apply to the taxable year for 
                which made and all succeeding taxable years 
                unless revoked with the consent of the 
                Secretary. An election under this paragraph may 
                not be made for any taxable year to which an 
                election under paragraph (4) applies.
          [(6) Consistent treatment of expenses required.--
                  [(A) In general.--Notwithstanding whether the 
                period for filing a claim for credit or refund 
                has expired for any taxable year taken into 
                account in determining the fixed-base 
                percentage, the qualified research expenses 
                taken into account in computing such percentage 
                shall be determined on a basis consistent with 
                the determination of qualified research 
                expenses for the credit year.
                  [(B) Prevention of distortions.--The 
                Secretary may prescribe regulations to prevent 
                distortions in calculating a taxpayer's 
                qualified research expenses or gross receipts 
                caused by a change in accounting methods used 
                by such taxpayer between the current year and a 
                year taken into account in computing such 
                taxpayer's fixed-base percentage.
          [(7) Gross receipts.--For purposes of this 
        subsection, gross receipts for any taxable year shall 
        be reduced by returns and allowances made during the 
        taxable year. In the case of a foreign corporation, 
        there shall be taken into account only gross receipts 
        which are effectively connected with the conduct of a 
        trade or business within the United States, the 
        Commonwealth of Puerto Rico, or any possession of the 
        United States.]
  (c) Determination of Average Research Expenses for Prior 
Years.--
          (1) Special rule in case of no qualified research 
        expenditures in any of 3 preceding taxable years.--In 
        any case in which the taxpayer has no qualified 
        research expenses in any one of the 3 taxable years 
        preceding the taxable year for which the credit is 
        being determined, the amount determined under 
        subsection (a)(1) for such taxable year shall be equal 
        to 10 percent of the qualified research expenses for 
        the taxable year.
          (2) Consistent treatment of expenses.--
                  (A) In general.--Notwithstanding whether the 
                period for filing a claim for credit or refund 
                has expired for any taxable year taken into 
                account in determining the average qualified 
                research expenses, or average basic research 
                payments, taken into account under subsection 
                (a), the qualified research expenses and basic 
                research payments taken into account in 
                determining such averages shall be determined 
                on a basis consistent with the determination of 
                qualified research expenses and basic research 
                payments, respectively, for the credit year.
                  (B) Prevention of distortions.--The Secretary 
                may prescribe regulations to prevent 
                distortions in calculating a taxpayer's 
                qualified research expenses or basic research 
                payments caused by a change in accounting 
                methods used by such taxpayer between the 
                current year and a year taken into account in 
                determining the average qualified research 
                expenses or average basic research payments 
                taken into account under subsection (a).
  (d) Qualified Research Defined.--For purposes of this 
section--
          (1) In general.--The term ``qualified research'' 
        means research--
                  (A) with respect to which expenditures may be 
                treated as expenses under section 174,
                  (B) which is undertaken for the purpose of 
                discovering information--
                          (i) which is technological in nature, 
                        and
                          (ii) the application of which is 
                        intended to be useful in the 
                        development of a new or improved 
                        business component of the taxpayer, and
                  (C) substantially all of the activities of 
                which constitute elements of a process of 
                experimentation for a purpose described in 
                paragraph (3).
        Such term does not include any activity described in 
        paragraph (4).
          (2) Tests to be applied separately to each business 
        component.--For purposes of this subsection--
                  (A) In general.--Paragraph (1) shall be 
                applied separately with respect to each 
                business component of the taxpayer.
                  (B) Business component defined.--The term 
                ``business component'' means any product, 
                process, computer software, technique, formula, 
                or invention which is to be--
                          (i) held for sale, lease, or license, 
                        or
                          (ii) used by the taxpayer in a trade 
                        or business of the taxpayer.
                  (C) Special rule for production processes.--
                Any plant process, machinery, or technique for 
                commercial production of a business component 
                shall be treated as a separate business 
                component (and not as part of the business 
                component being produced).
          (3) Purposes for which research may qualify for 
        credit.--For purposes of paragraph (1)(C)--
                  (A) In general.--Research shall be treated as 
                conducted for a purpose described in this 
                paragraph if it relates to--
                          (i) a new or improved function,
                          (ii) performance, or
                          (iii) reliability or quality.
                  (B) Certain purposes not qualified.--Research 
                shall in no event be treated as conducted for a 
                purpose described in this paragraph if it 
                relates to style, taste, cosmetic, or seasonal 
                design factors.
          (4) Activities for which credit not allowed.--The 
        term ``qualified research'' shall not include any of 
        the following:
                  (A) Research after commercial production.--
                Any research conducted after the beginning of 
                commercial production of the business 
                component.
                  (B) Adaptation of existing business 
                components.--Any research related to the 
                adaptation of an existing business component to 
                a particular customer's requirement or need.
                  (C) Duplication of existing business 
                component.--Any research related to the 
                reproduction of an existing business component 
                (in whole or in part) from a physical 
                examination of the business component itself or 
                from plans, blueprints, detailed 
                specifications, or publicly available 
                information with respect to such business 
                component.
                  (D) Surveys, studies, etc..--Any--
                          (i) efficiency survey,
                          (ii) activity relating to management 
                        function or technique,
                          (iii) market research, testing, or 
                        development (including advertising or 
                        promotions),
                          (iv) routine data collection, or
                          (v) routine or ordinary testing or 
                        inspection for quality control.
                  (E) Computer software.--Except to the extent 
                provided in regulations, any research with 
                respect to computer software which is developed 
                by (or for the benefit of) the taxpayer 
                primarily for internal use by the taxpayer, 
                other than for use in--
                          (i) an activity which constitutes 
                        qualified research (determined with 
                        regard to this subparagraph), or
                          (ii) a production process with 
                        respect to which the requirements of 
                        paragraph (1) are met.
                  (F) Foreign research.--Any research conducted 
                outside the United States, the Commonwealth of 
                Puerto Rico, or any possession of the United 
                States.
                  (G) Social sciences, etc..--Any research in 
                the social sciences, arts, or humanities.
                  (H) Funded research.--Any research to the 
                extent funded by any grant, contract, or 
                otherwise by another person (or governmental 
                entity).
  [(e) Credit Allowable With Respect to Certain Payments to 
Qualified Organizations for Basic Research.--For purposes of 
this section--
          [(1) In general.--In the case of any taxpayer who 
        makes basic research payments for any taxable year--
                  [(A) the amount of basic research payments 
                taken into account under subsection (a)(2) 
                shall be equal to the excess of--
                          [(i) such basic research payments, 
                        over
                          [(ii) the qualified organization base 
                        period amount, and
                  [(B) that portion of such basic research 
                payments which does not exceed the qualified 
                organization base period amount shall be 
                treated as contract research expenses for 
                purposes of subsection (a)(1).
          [(2) Basic research payments defined.--For purposes 
        of this subsection--
                  [(A) 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.
                  [(B) Exception to requirement that research 
                be performed by the organization.--In the case 
                of a qualified organization described in 
                subparagraph (C) or (D) of paragraph (6), 
                clause (ii) of subparagraph (A) shall not 
                apply.
          [(3) Qualified organization base period amount.--For 
        purposes of this subsection, the term ``qualified 
        organization base period amount'' means an amount equal 
        to the sum of--
                  [(A) the minimum basic research amount, plus
                  [(B) the maintenance-of-effort amount.
          [(4) Minimum basic research amount.--For purposes of 
        this subsection--
                  [(A) In general.--The term ``minimum basic 
                research amount'' means an amount equal to the 
                greater of--
                          [(i) 1 percent of the average of the 
                        sum of amounts paid or incurred during 
                        the base period for--
                                  [(I) any in-house research 
                                expenses, and
                                  [(II) any contract research 
                                expenses, or
                          [(ii) the amounts treated as contract 
                        research expenses during the base 
                        period by reason of this subsection (as 
                        in effect during the base period).
                  [(B) Floor amount.--Except in the case of a 
                taxpayer which was in existence during a 
                taxable year (other than a short taxable year) 
                in the base period, the minimum basic research 
                amount for any base period shall not be less 
                than 50 percent of the basic research payments 
                for the taxable year for which a determination 
                is being made under this subsection.
          [(5) Maintenance-of-effort amount.--For purposes of 
        this subsection--
                  [(A) In general.--The term ``maintenance-of-
                effort amount'' means, with respect to any 
                taxable year, an amount equal to the excess (if 
                any) of--
                          [(i) an amount equal to--
                                  [(I) the average of the 
                                nondesignated university 
                                contributions paid by the 
                                taxpayer during the base 
                                period, multiplied by
                                  [(II) the cost-of-living 
                                adjustment for the calendar 
                                year in which such taxable year 
                                begins, over (ii) the amount of 
                                nondesignated university 
                                contributions paid by the 
                                taxpayer during such taxable 
                                year.
                  [(B) Nondesignated university 
                contributions.--For purposes of this paragraph, 
                the term ``nondesignated university 
                contribution'' means any amount paid by a 
                taxpayer to any qualified organization 
                described in paragraph (6)(A)--
                          [(i) for which a deduction was 
                        allowable under section 170, and
                          [(ii) which was not taken into 
                        account--
                                  [(I) in computing the amount 
                                of the credit under this 
                                section (as in effect during 
                                the base period) during any 
                                taxable year in the base 
                                period, or
                                  [(II) as a basic research 
                                payment for purposes of this 
                                section.
                  [(C) Cost-of-living adjustment defined.--
                          [(i) In general.--The cost-of-living 
                        adjustment for any calendar year is the 
                        cost-of-living adjustment for such 
                        calendar year determined under section 
                        1(f)(3), by substituting ``calendar 
                        year 1987'' for ``calendar year 1992'' 
                        in subparagraph (B) thereof.
                          [(ii) Special rule where base period 
                        ends in a calendar year other than 1983 
                        or 1984.--If the base period of any 
                        taxpayer does not end in 1983 or 1984, 
                        section 1(f)(3)(B) shall, or purposes 
                        of this paragraph, be applied by 
                        substituting the calendar year in which 
                        such base period ends for 1992. Such 
                        substitution shall be in lieu of the 
                        substitution under clause (i).]
  (e) Basic Research Payments.-- For purposes of this section--
          (1) 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--
                  (A) such payment is pursuant to a written 
                agreement between such corporation and such 
                qualified organization, and
                  (B) such basic research is to be performed by 
                such qualified organization.
          (2) Exception to requirement that research be 
        performed by the organization.--In the case of a 
        qualified organization described in subparagraph (C) or 
        (D) of paragraph (3), subparagraph (B) of paragraph (1) 
        shall not apply.
          [(6)] (3) Qualified organization.--For purposes of 
        this subsection, the term ``qualified organization'' 
        means any of the following organizations:
                  (A) 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).
                  (B) Certain scientific research 
                organizations.--Any organization not described 
                in subparagraph (A) 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.
                  (C) Scientific tax-exempt organizations.--Any 
                organization which--
                          (i) is described in--
                                  (I) section 501(c)(3) (other 
                                than a private foundation), or
                                  (II) 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 subparagraph (A) pursuant 
                        to written research agreements, and
                          (iv) currently expends--
                                  (I) substantially all of its 
                                funds, or
                                  (II) substantially all of the 
                                basic research payments 
                                received by it,
                        for grants to, or contracts for basic 
                        research with, an organization 
                        described in subparagraph (A).
                  (D) Certain grant organizations.--Any 
                organization not described in subparagraph (B) 
                or (C) 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 clause (i),
                          (iii) is organized and operated 
                        exclusively for the purpose of making 
                        grants to organizations described in 
                        subparagraph (A) 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).
          [(7)] (4) Definitions and special rules.--For 
        purposes of this subsection--
                  (A) 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.
                  [(B) Base period.--The term ``base period'' 
                means the 3-taxable-year period ending with the 
                taxable year immediately preceding the 1st 
                taxable year of the taxpayer beginning after 
                December 31, 1983.
                  [(C) Exclusion from incremental credit 
                calculation.--For purposes of determining the 
                amount of credit allowable under subsection 
                (a)(1) for any taxable year, the amount of the 
                basic research payments taken into account 
                under subsection (a)(2)--
                          [(i) shall not be treated as 
                        qualified research expenses under 
                        subsection (a)(1)(A), and
                          [(ii) shall not be included in the 
                        computation of base amount under 
                        subsection (a)(1)(B).]
                  [(D)] (B) Trade or business qualification.--
                For purposes of applying subsection (b)(1) to 
                this subsection, 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 subsection 
                (b)(3)(B)).
                  [(E)] (C) 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)).
  (f) Special Rules.--For purposes of this section--
          (1) Aggregation of expenditures.--
                  (A) Controlled group of corporations.--In 
                determining the amount of the credit under this 
                section--
                          (i) all members of the same 
                        controlled group of corporations shall 
                        be treated as a single taxpayer, and
                          (ii) the credit (if any) allowable by 
                        this section to each such member shall 
                        be determined on a proportionate basis 
                        to its share of the aggregate of the 
                        qualified research expenses, basic 
                        research payments, and amounts paid or 
                        incurred to energy research 
                        consortiums, taken into account by such 
                        controlled group for purposes of this 
                        section.
                  (B) Common control.--Under regulations 
                prescribed by the Secretary, in determining the 
                amount of the credit under this section--
                          (i) all trades or businesses (whether 
                        or not incorporated) which are under 
                        common control shall be treated as a 
                        single taxpayer, and
                          (ii) the credit (if any) allowable by 
                        this section to each such person shall 
                        be determined on a proportionate basis 
                        to its share of the aggregate of the 
                        qualified research expenses, basic 
                        research payments, and amounts paid or 
                        incurred to energy research 
                        consortiums, taken into account by all 
                        such persons under common control for 
                        purposes of this section.
                The regulations prescribed under this 
                subparagraph shall be based on principles 
                similar to the principles which apply in the 
                case of subparagraph (A).
          (2) Allocations.--
                  (A) Pass-thru in the case of estates and 
                trusts.--Under regulations prescribed by the 
                Secretary, rules similar to the rules of 
                subsection (d) of section 52 shall apply.
                  (B) Allocation in the case of partnerships.--
                In the case of partnerships, the credit shall 
                be allocated among partners under regulations 
                prescribed by the Secretary.
          (3) Adjustments for certain acquisitions, etc..--
        Under regulations prescribed by the Secretary--
                  (A) Acquisitions.--
                          (i) In general.--If a person acquires 
                        the major portion of either a trade or 
                        business or a separate unit of a trade 
                        or business (hereinafter in this 
                        paragraph referred to as the ``acquired 
                        business'') of another person 
                        (hereinafter in this paragraph referred 
                        to as the ``predecessor''), then the 
                        amount of qualified research expenses 
                        paid or incurred by the acquiring 
                        person during the measurement period 
                        shall be increased by the amount 
                        determined under clause (ii)[, and the 
                        gross receipts of the acquiring person 
                        for such period shall be increased by 
                        the amount determined under clause 
                        (iii)].
                          (ii) Amount determined with respect 
                        to qualified research expenses.--The 
                        amount determined under this clause 
                        is--
                                  (I) for purposes of applying 
                                this section for the taxable 
                                year in which such acquisition 
                                is made, the acquisition year 
                                amount, and
                                  (II) for purposes of applying 
                                this section for any taxable 
                                year after the taxable year in 
                                which such acquisition is made, 
                                the qualified research expenses 
                                paid or incurred by the 
                                predecessor with respect to the 
                                acquired business during the 
                                measurement period.
                          [(iii) Amount determined with respect 
                        to gross receipts.--The amount 
                        determined under this clause is the 
                        amount which would be determined under 
                        clause (ii) if ``the gross receipts 
                        of'' were substituted for ``the 
                        qualified research expenses paid or 
                        incurred by'' each place it appears in 
                        clauses (ii) and (iv).]
                          [(iv)] (iii) Acquisition year 
                        amount.--For purposes of clause (ii), 
                        the acquisition year amount is the 
                        amount equal to the product of--
                                  (I) the qualified research 
                                expenses paid or incurred by 
                                the predecessor with respect to 
                                the acquired business during 
                                the measurement period, and
                                  (II) the number of days in 
                                the period beginning on the 
                                date of the acquisition and 
                                ending on the last day of the 
                                taxable year in which the 
                                acquisition is made,
                        divided by the number of days in the 
                        acquiring person's taxable year.
                          [(v)] (iv) Special rules for 
                        coordinating taxable years.--In the 
                        case of an acquiring person and a 
                        predecessor whose taxable years do not 
                        begin on the same date--
                                  (I) each reference to a 
                                taxable year in clauses (ii) 
                                [and (iv)] and (iii) shall 
                                refer to the appropriate 
                                taxable year of the acquiring 
                                person,
                                  (II) the qualified research 
                                expenses paid or incurred by 
                                the predecessor[, and the gross 
                                receipts of the predecessor,] 
                                during each taxable year of the 
                                predecessor any portion of 
                                which is part of the 
                                measurement period shall be 
                                allocated equally among the 
                                days of such taxable year, and
                                  (III) the amount of such 
                                qualified research expenses 
                                taken into account under 
                                clauses (ii) [and (iv)] and 
                                (iii) with respect to a taxable 
                                year of the acquiring person 
                                shall be equal to the total of 
                                the expenses attributable under 
                                subclause (II) to the days 
                                occurring during such taxable 
                                year[, and].
                                  [(IV) the amount of such 
                                gross receipts taken into 
                                account under clause (iii) with 
                                respect to a taxable year of 
                                the acquiring person shall be 
                                equal to the total of the gross 
                                receipts attributable under 
                                subclause (II) to the days 
                                occurring during such taxable 
                                year.]
                          [(vi)] (v) Measurement period.--For 
                        purposes of this subparagraph, the term 
                        ``measurement period'' means, with 
                        respect to the taxable year of the 
                        acquiring person for which the credit 
                        is determined, any period of the 
                        acquiring person preceding such taxable 
                        year which is taken into account for 
                        purposes of determining the credit for 
                        such year.
                  (B) Dispositions.--If the predecessor 
                furnished to the acquiring person such 
                information as is necessary for the application 
                of subparagraph (A), then, for purposes of 
                applying this section for any taxable year 
                ending after such disposition, the amount of 
                qualified research expenses paid or incurred 
                by[, and the gross receipts of,] the 
                predecessor during the measurement period (as 
                defined in subparagraph [(A)(vi)] (A)(v), 
                determined by substituting ``predecessor'' for 
                ``acquiring person'' each place it appears) 
                shall be reduced by--
                          (i) in the case of the taxable year 
                        in which such disposition is made, an 
                        amount equal to the product of--
                                  (I) the qualified research 
                                expenses paid or incurred by[, 
                                or gross receipts of,] the 
                                predecessor with respect to the 
                                acquired business during the 
                                measurement period (as so 
                                defined and so determined), and
                                  (II) the number of days in 
                                the period beginning on the 
                                date of acquisition (as 
                                determined for purposes of 
                                subparagraph [(A)(iv)(II)] 
                                (A)(iii)(II)) and ending on the 
                                last day of the taxable year of 
                                the predecessor in which the 
                                disposition is made,
                        divided by the number of days in the 
                        taxable year of the predecessor, and
                          (ii) in the case of any taxable year 
                        ending after the taxable year in which 
                        such disposition is made, the amount 
                        described in clause (i)(I).
                  [(C) Certain reimbursements taken into 
                account in determining fixed-base percentage.--
                If during any of the 3 taxable years following 
                the taxable year in which a disposition to 
                which subparagraph (B) applies occurs, the 
                disposing taxpayer (or a person with whom the 
                taxpayer is required to aggregate expenditures 
                under paragraph (1)) reimburses the acquiring 
                person (or a person required to so aggregate 
                expenditures with such person) for research on 
                behalf of the taxpayer, then the amount of 
                qualified research expenses of the taxpayer for 
                the taxable years taken into account in 
                computing the fixed-base percentage shall be 
                increased by the lesser of--
                          [(i) the amount of the decrease under 
                        subparagraph (B) which is allocable to 
                        taxable years so taken into account, or
                          [(ii) the product of the number of 
                        taxable years so taken into account, 
                        multiplied by the amount of the 
                        reimbursement described in this 
                        subparagraph.]
                  (C) Adjustments for basic research 
                payments.--In the case of basic research 
                payments, rules similar to the rules of 
                subparagraph (A) and (B) shall apply.
          (4) Short taxable years.--In the case of any short 
        taxable year, qualified research expenses [and gross 
        receipts] and basic research payments shall be 
        annualized in such circumstances and under such methods 
        as the Secretary may prescribe by regulation.
          (5) Controlled group of corporations.--The term 
        ``controlled group of corporations'' has the same 
        meaning given to such term by section 1563(a), except 
        that--
                  (A) ``more than 50 percent'' shall be 
                substituted for ``at least 80 percent'' each 
                place it appears in section 1563(a)(1), and
                  (B) the determination shall be made without 
                regard to subsections (a)(4) and (e)(3)(C) of 
                section 1563.
          (6) Energy research consortium.--
                  (A) In general.--The term ``energy research 
                consortium'' means any organization--
                          (i) which is--
                                  (I) described in section 
                                501(c)(3) and is exempt from 
                                tax under section 501(a) and is 
                                organized and operated 
                                primarily to conduct energy 
                                research, or
                                  (II) organized and operated 
                                primarily to conduct energy 
                                research in the public interest 
                                (within the meaning of section 
                                501(c)(3)),
                          (ii) which is not a private 
                        foundation,
                          (iii) to which at least 5 unrelated 
                        persons paid or incurred during the 
                        calendar year in which the taxable year 
                        of the organization begins amounts 
                        (including as contributions) to such 
                        organization for energy research, and
                          (iv) to which no single person paid 
                        or incurred (including as 
                        contributions) during such calendar 
                        year an amount equal to more than 50 
                        percent of the total amounts received 
                        by such organization during such 
                        calendar year for energy research.
                  (B) Treatment of persons.--All persons 
                treated as a single employer under subsection 
                (a) or (b) of section 52 shall be treated as 
                related persons for purposes of subparagraph 
                (A)(iii) and as a single person for purposes of 
                subparagraph (A)(iv).
                  (C) Foreign research.--For purposes of 
                subsection (a)(3), amounts paid or incurred for 
                any energy research conducted outside the 
                United States, the Commonwealth of Puerto Rico, 
                or any possession of the United States shall 
                not be taken into account.
                  (D) Denial of double benefit.--Any amount 
                taken into account under subsection (a)(3) 
                shall not be taken into account under paragraph 
                (1) or (2) of subsection (a).
                  (E) Energy research.--The term ``energy 
                research'' does not include any research which 
                is not qualified research.
  (g) Special Rule for Pass-Thru of Credit.--In the case of an 
individual who--
          (1) owns an interest in an unincorporated trade or 
        business,
          (2) is a partner in a partnership,
          (3) is a beneficiary of an estate or trust, or
          (4) is a shareholder in an S corporation,
the amount determined under subsection (a) for any taxable year 
shall not exceed an amount (separately computed with respect to 
such person's interest in such trade or business or entity) 
equal to the amount of tax attributable to that portion of a 
person's taxable income which is allocable or apportionable to 
the person's interest in such trade or business or entity. If 
the amount determined under subsection (a) for any taxable year 
exceeds the limitation of the preceding sentence, such amount 
may be carried to other taxable years under the rules of 
section 39; except that the limitation of the preceding 
sentence shall be taken into account in lieu of the limitation 
of section 38(c) in applying section 39.
  [(h) Termination.--
          [(1) In general.--This section shall not apply to any 
        amount paid or incurred after December 31, 2014.
          [(2) Termination of alternative incremental credit.--
        No election under subsection (c)(4) shall apply to 
        taxable years beginning after December 31, 2008.
          [(2)  Computation for taxable year in which credit 
        terminates.--In the case of any taxable year with 
        respect to which this section applies to a number of 
        days which is less than the total number of days in 
        such taxable year--
                  [(A) the amount determined under subsection 
                (c)(1)(B) with respect to such taxable year 
                shall be the amount which bears the same ratio 
                to such amount (determined without regard to 
                this paragraph) as the number of days in such 
                taxable year to which this section applies 
                bears to the total number of days in such 
                taxable year, and
                  [(B) for purposes of subsection (c)(5), the 
                average qualified research expenses for the 
                preceding 3 taxable years shall be the amount 
                which bears the same ratio to such average 
                qualified research expenses (determined without 
                regard to this paragraph) as the number of days 
                in such taxable year to which this section 
                applies bears to the total number of days in 
                such taxable year.]

           *       *       *       *       *       *       *


SEC. 45C. CLINICAL TESTING EXPENSES FOR CERTAIN DRUGS FOR RARE DISEASES 
                    OR CONDITIONS.

  (a) General Rule.--For purposes of section 38, the credit 
determined under this section for the taxable year is an amount 
equal to 50 percent of the qualified clinical testing expenses 
for the taxable year.
  (b) Qualified Clinical Testing Expenses.--For purposes of 
this section--
          (1) Qualified clinical testing expenses.--
                  (A) In general.--Except as otherwise provided 
                in this paragraph, the term ``qualified 
                clinical testing expenses'' means the amounts 
                which are paid or incurred by the taxpayer 
                during the taxable year which would be 
                described in subsection (b) of section 41 if 
                such subsection were applied with the 
                modifications set forth in subparagraph (B).
                  (B) Modifications.--For purposes of 
                subparagraph (A), subsection (b) of section 41 
                shall be applied--
                          (i) by substituting ``clinical 
                        testing'' for ``qualified research'' 
                        each place it appears in paragraphs (2) 
                        and (3) of such subsection, and
                          (ii) by substituting ``100 percent'' 
                        for ``65 percent'' in paragraph (3)(A) 
                        of such subsection.
                  (C) Exclusion for amounts funded by grants, 
                etc.--The term ``qualified clinical testing 
                expenses'' shall not include any amount to the 
                extent such amount is funded by any grant, 
                contract, or otherwise by another person (or 
                any governmental entity).
                  [(D) Special rule.--If section 41 is not in 
                effect for any period, such section shall be 
                deemed to remain in effect for such period for 
                purposes of this paragraph.]
          (2) Clinical testing.--
                  (A) In general.--The term ``clinical 
                testing'' means any human clinical testing--
                          (i) which is carried out under an 
                        exemption for a drug being tested for a 
                        rare disease or condition under section 
                        505(i) of the Federal Food, Drug, and 
                        Cosmetic Act (or regulations issued 
                        under such section),
                          (ii) which occurs--
                                  (I) after the date such drug 
                                is designated under section 526 
                                of such Act, and
                                  (II) before the date on which 
                                an application with respect to 
                                such drug is approved under 
                                section 505(b) of such Act or, 
                                if the drug is a biological 
                                product, before the date on 
                                which a license for such drug 
                                is issued under section 351 of 
                                the Public Health Service Act; 
                                and
                          (iii) which is conducted by or on 
                        behalf of the taxpayer to whom the 
                        designation under such section 526 
                        applies.
                  (B) Testing must be related to use for rare 
                disease or condition.--Human clinical testing 
                shall be taken into account under subparagraph 
                (A) only to the extent such testing is related 
                to the use of a drug for the rare disease or 
                condition for which it was designated under 
                section 526 of the Federal Food, Drug, and 
                Cosmetic Act.
  (c) Coordination With Credit for Increasing Research 
Expenditures.--
          (1) In general.--Except as provided in paragraph (2), 
        any qualified clinical testing expenses for a taxable 
        year to which an election under this section applies 
        shall not be taken into account for purposes of 
        determining the credit allowable under section 41 for 
        such taxable year.
          (2) Expenses included in determining [base period 
        research expenses]  average qualified research 
        expenses.--Any qualified clinical testing expenses for 
        any taxable year which are qualified research expenses 
        (within the meaning of section 41(b)) shall be taken 
        into account in determining [base period research 
        expenses] average qualified research expenses for 
        purposes of applying section 41 to subsequent taxable 
        years.
  (d) Definition and Special Rules.--
          (1) Rare disease or condition.--For purposes of this 
        section, the term ``rare disease or condition'' means 
        any disease or condition which--
                  (A) affects less than 200,000 persons in the 
                United States, or
                  (B) affects more than 200,000 persons in the 
                United States but for which there is no 
                reasonable expectation that the cost of 
                developing and making available in the United 
                States a drug for such disease or condition 
                will be recovered from sales in the United 
                States of such drug.
        Determinations under the preceding sentence with 
        respect to any drug shall be made on the basis of the 
        facts and circumstances as of the date such drug is 
        designated under section 526 of the Federal Food, Drug, 
        and Cosmetic Act.
          (2) Special limitations on foreign testing.--
                  (A) In general.--No credit shall be allowed 
                under this section with respect to any clinical 
                testing conducted outside the United States 
                unless--
                          (i) such testing is conducted outside 
                        the United States because there is an 
                        insufficient testing population in the 
                        United States, and
                          (ii) such testing is conducted by a 
                        United States person or by any other 
                        person who is not related to the 
                        taxpayer to whom the designation under 
                        section 526 of the Federal Food, Drug, 
                        and Cosmetic Act applies.
                  (B) Special limitation for corporations to 
                which section 936 applies.--No credit shall be 
                allowed under this section with respect to any 
                clinical testing conducted by a corporation to 
                which an election under section 936 applies.
          (3) Certain rules made applicable.--Rules similar to 
        the rules of paragraphs (1) and (2) of section 41(f) 
        shall apply for purposes of this section.
          (4) Election.--This section shall apply to any 
        taxpayer for any taxable year only if such taxpayer 
        elects (at such time and in such manner as the 
        Secretary may by regulations prescribe) to have this 
        section apply for such taxable year.

           *       *       *       *       *       *       *


Subchapter B--Computation of Taxable Income

           *       *       *       *       *       *       *


PART IX--ITEMS NOT DEDUCTIBLE

           *       *       *       *       *       *       *



SEC. 280C. CERTAIN EXPENSES FOR WHICH CREDITS ARE ALLOWABLE.

  (a) Rule for Employment Credits.--No deduction shall be 
allowed for that portion of the wages or salaries paid or 
incurred for the taxable year which is equal to the sum of the 
credits determined for the taxable year under sections 45A(a), 
45P(a), 51(a), and 1396(a), 1400P(b), and 1400R. In the case of 
a corporation which is a member of a controlled group of 
corporations (within the meaning of section 52(a)) or a trade 
or business which is treated as being under common control with 
other trades or businesses (within the meaning of section 
52(b)), this subsection shall be applied under rules prescribed 
by the Secretary similar to the rules applicable under 
subsections (a) and (b) of section 52.
  (b) Credit for Qualified Clinical Testing Expenses for 
Certain Drugs.--
          (1) In general.--No deduction shall be allowed for 
        that portion of the qualified clinical testing expenses 
        (as defined in section 45C(b)) otherwise allowable as a 
        deduction for the taxable year which is equal to the 
        amount of the credit allowable for the taxable year 
        under section 45C (determined without regard to section 
        38(c)).
          (2) Similar rule where taxpayer capitalizes rather 
        than deducts expenses.--If--
                  (A) the amount of the credit allowable for 
                the taxable year under section 45C (determined 
                without regard to section 38(c)), exceeds
                  (B) the amount allowable as a deduction for 
                the taxable year for qualified clinical testing 
                expenses (determined without regard to 
                paragraph (1)),
        the amount chargeable to capital account for the 
        taxable year for such expenses shall be reduced by the 
        amount of such excess.
          (3) Controlled groups.--In the case of a corporation 
        which is a member of a controlled group of corporations 
        (within the meaning of section 41(f)(5)) or a trade or 
        business which is treated as being under common control 
        with other trades or business (within the meaning of 
        section 41(f)(1)(B)), this subsection shall be applied 
        under rules prescribed by the Secretary similar to the 
        rules applicable under subparagraphs (A) and (B) of 
        section 41(f)(1).
  (c) Credit for Increasing Research Activities.--
          (1) In general.--No deduction shall be allowed for 
        that portion of the qualified research expenses (as 
        defined in section 41(b)) or [basic research expenses 
        (as defined in section 41(e)(2))] basic research 
        payments (as defined in section 41(e)(1)) otherwise 
        allowable as a deduction for the taxable year which is 
        equal to the amount of the credit determined for such 
        taxable year under section 41(a).
          (2) Similar rule where taxpayer capitalizes rather 
        than deducts expenses.--If--
                  (A) the amount of the credit determined for 
                the taxable year under section 41(a)(1), 
                exceeds
                  (B) the amount allowable as a deduction for 
                such taxable year for qualified research 
                expenses or [basic research expenses] basic 
                research payments (determined without regard to 
                paragraph (1)),
        the amount chargeable to capital account for the 
        taxable year for such expenses shall be reduced by the 
        amount of such excess.
          (3) Election of reduced credit.--
                  (A) In general.--In the case of any taxable 
                year for which an election is made under this 
                paragraph--
                          (i) paragraphs (1) and (2) shall not 
                        apply, and
                          (ii) the amount of the credit under 
                        section 41(a) shall be the amount 
                        determined under subparagraph (B).
                  (B) Amount of reduced credit.--The amount of 
                credit determined under this subparagraph for 
                any taxable year shall be the amount equal to 
                the excess of--
                          (i) the amount of credit determined 
                        under section 41(a) without regard to 
                        this paragraph, over
                          (ii) the product of--
                                  (I) the amount described in 
                                clause (i), and
                                  (II) the maximum rate of tax 
                                under section 11(b)(1).
                  (C) Election.--An election under this 
                paragraph for any taxable year shall be made 
                not later than the time for filing the return 
                of tax for such year (including extensions), 
                shall be made on such return, and shall be made 
                in such manner as the Secretary may prescribe. 
                Such an election, once made, shall be 
                irrevocable.
          (4) Controlled groups.--Paragraph (3) of subsection 
        (b) shall apply for purposes of this subsection.
  (d) Credit for Low Sulfur Diesel Fuel Production.--The 
deductions otherwise allowed under this chapter for the taxable 
year shall be reduced by the amount of the credit determined 
for the taxable year under section 45H(a).
  (e) Mine Rescue Team Training Credit.--No deduction shall be 
allowed for that portion of the expenses otherwise allowable as 
a deduction for the taxable year which is equal to the amount 
of the credit determined for the taxable year under section 
45N(a).
  (f) Credit for Security of Agricultural Chemicals.--No 
deduction shall be allowed for that portion of the expenses 
otherwise allowable as a deduction taken into account in 
determining the credit under section 45O for the taxable year 
which is equal to the amount of the credit determined for such 
taxable year under section 45O(a).
  (g)  Credit for Health Insurance Premiums.--
   No deduction shall be allowed for the portion of the 
premiums paid by the taxpayer for coverage of 1 or more 
individuals under a qualified health plan which is equal to the 
amount of the credit determined for the taxable year under 
section 36B(a) with respect to such premiums.
  (h) Credit for Employee Health Insurance Expenses of Small 
Employers.--No deduction shall be allowed for that portion of 
the premiums for qualified health plans (as defined in section 
1301(a) of the Patient Protection and Affordable Care Act), or 
for health insurance coverage in the case of taxable years 
beginning in 2010, 2011, 2012, or 2013, paid by an employer 
which is equal to the amount of the credit determined under 
section 45R(a) with respect to the premiums.
  (g)  Qualifying Therapeutic Discovery Project Credit.--
          (1) In general.--No deduction shall be allowed for 
        that portion of the qualified investment (as defined in 
        section 48D(b)) otherwise allowable as a deduction for 
        the taxable year which--
                  (A) would be qualified research expenses (as 
                defined in section 41(b)), basic research 
                expenses (as defined in section 41(e)(2)), or 
                qualified clinical testing expenses (as defined 
                in section 45C(b)) if the credit under section 
                41 or section 45C were allowed with respect to 
                such expenses for such taxable year, and
                  (B) is equal to the amount of the credit 
                determined for such taxable year under section 
                48D(a), reduced by--
                          (i) the amount disallowed as a 
                        deduction by reason of section 
                        48D(e)(2)(B), and
                          (ii) the amount of any basis 
                        reduction under section 48D(e)(1).
          (2) Similar rule where taxpayer capitalizes rather 
        than deducts expenses.--In the case of expenses 
        described in paragraph (1)(A) taken into account in 
        determining the credit under section 48D for the 
        taxable year, if--
                  (A) the amount of the portion of the credit 
                determined under such section with respect to 
                such expenses, exceeds
                  (B) the amount allowable as a deduction for 
                such taxable year for such expenses (determined 
                without regard to paragraph (1)),
        the amount chargeable to capital account for the 
        taxable year for such expenses shall be reduced by the 
        amount of such excess.
          (3) Controlled groups.--Paragraph (3) of subsection 
        (b) shall apply for purposes of this subsection.

           *       *       *       *       *       *       *


                         VII. DISSENTING VIEWS

    The two permanent tax extender bills approved by the 
Republicans at the markup would add more than $224 billion to 
the deficit. Together with the seven bills that were approved 
by the Republicans in the previous markup, these nine bills 
would add more than $317 billion to the deficit. In the 113th 
Congress, Ways and Means Committee Republicans selectively 
approved 14 of the more than 50 expired tax provisions, 
totaling more than $825 billion worth of deficit-financed, 
permanent tax cuts. This selective approach failed last 
Congress, with none of these permanent provisions being enacted 
into law. The bills marked up by the Committee set us down a 
partisan path, when we should be embracing bipartisanship and 
working in a responsible, bipartisan manner on tax reform.
    Even though some of these bills were introduced 
individually with some bipartisan support, the opposition to 
these bills is based on the position that these tax provisions 
should not be made permanent by adding to the deficit without 
any revenue offset. The research and experimentation credit is 
critical to helping our nation's companies innovate and 
compete. But the fiscally irresponsible approach that the 
Committee Republicans are taking with respect to this and other 
important legislation undermines the bipartisan support that 
the provisions enjoy. It is true that this provision was 
included in the Republican tax reform plan introduced by the 
Ways and Means Committee Chairman last Congress--but the cost 
of this provision was responsibly offset in the ten-year 
window. Clearly, Chairman Camp recognized the importance of 
paying for the permanence of these provisions in the Republican 
tax reform plan, and not playing games by passing these 
important provisions outside of the important work this 
Committee has ahead of it. The American people expect a tax 
code that maintains and supports our shared priorities, and 
each time the Committee considers these bills in a piecemeal 
approach, it is taking a step in the wrong direction and away 
from comprehensive tax reform.
    We all support provisions that facilitate innovation and 
advancement to modernize our economy and enable our companies 
to grow and continue to lead. The markup was not to debate the 
need for government involvement in spurring research and 
development, or the merits of H.R. 880, which would make 
permanent the expanded tax credit for research and 
experimentation, and expand the credit to ensure that it would 
not lose its value for certain taxpayers because of 
interactions with the alternative minimum tax system.
    Finally, we also oppose the manner in which Republicans are 
proceeding--selecting to make permanent another two provisions 
today in addition to the previously passed seven provisions at 
a cost of more than $317 billion without any offset from the 
more than 50 tax provisions that expired at the end of last 
year. This approach is both fiscally irresponsible and contrary 
to the goals of bipartisan, comprehensive tax reform.
    Expired provisions must be dealt with in a comprehensive 
manner. The Republicans did not take up other tax extenders 
that also are important to Democratic Committee Members. Left 
to an uncertain fate are provisions like the Work Opportunity 
Tax Credit, the New Markets Tax Credit, and the renewable 
energy tax credits, as well as the long-term status of the 
Earned Income Tax Credit, the Child Tax Credit, and the 
American Opportunity Tax Credit.

                                           Sander M. Levin,
                                                    Ranking Member.

                                  [all]