Allow an R&D Credit for the Actual Amount of N. C. Expenditures

Position:  NCCBI believes the North Carolina General Assembly should allow taxpayers to receive a fixed percentage of their actual, yearly research and development expenditures performed in North Carolina as a credit against North Carolina income and franchise taxes, rather than 5% of the apportioned qualified research expenses determined under IRC 41 or the alternative incremental method.

Explanation: Currently, North Carolina General Statute 105-129 10 allows taxpayers a tax credit in the amount 5% of the qualified research expenses as determined under IRC 41.  The calculations prescribed in 41 utilize base year expenditures and a percentage of annual gross receipts as thresholds in determining the amount of R&D credit to which a company is entitled. This calculation of credit “penalizes” start-up and certain large companies which do not grow research expenditures relative to sales growth. North Carolina recently passed legislation adopting the federal alternative method provisions, a federal change recognizing the arbitrary nature of the then existing federal credit provisions.

The benefit of the North Carolina credit is diminished by the temporary nature of the federal credit. The federal credit, which must be extended annually, often expires before reinstatement. This year, the federal credit expired on June 30, and was not reinstated until late October. The federal credit expired completely between July 1, 1995 and June 30, 1996 leaving no credit for taxpayers during that period. Under the present law, taxpayers must meet several criterion under the Federal Code before it can determine if a credit is available for federal income tax purposes. Only then may it determine the amount, if any, of credit available for North Carolina income or franchise tax purposes.  Finally, current law fails to reward relative increases in research conducted in North Carolina. For example, if a company were to move $100 million in research expenses from another state into North Carolina, but still not exceed the federal limitations in total annual research expenditures, such company would receive no credit in North Carolina.

Taxpayers should be allowed to receive a flat percentage of their yearly  R&D expenditures, occurring in North Carolinas, as a tax credit.  Such credit should be allowed a carryforward period of at least fifteen (15) years.  The proposed change in this tax credit provision would remove the uncertainty for taxpayers doing business in the state as all qualified expenses incurred in this state during each taxable year would be eligible for the research tax credit. The availability of the credit would not continue to depend on the budget negotiations of the United States Congress. Companies incurring research expenditures cross all industry lines; therefore, this change in the R&D credit would benefit taxpayers without being discriminatory or targeting specific industries. Consequently, companies would realize more value from their R&D activities and would have more incentive to increase such activities in this state.  Since companies bear an inherent risk of being unsuccessful when developing new products, less constrained R&D budgets could result in pursuit of previously unfeasible ideas. The public at large could benefit from safer, more advanced products being brought to market faster, and North Carolina will benefit from increased high wage employment – the largest component of qualifying research expenditures.

Allowing a flat percentage against a company’s North Carolina R&D activities would be the most competitive state tax credit of its kind in the entire United States.  This change could potentially attract new businesses and prompt out-of-state companies to relocate to North Carolina.

Below is a comparison of the present and proposed law:

Present Law

A taxpayer that claims for the taxable year a federal income tax credit under Section 41 (a) of the Code for increasing research activities is allowed a credit equal to five percent (5%) of the State’s apportioned share activities. The State’s    taxable year.  As used        Code.

A taxpayer that claims the alternative incremental credit is allowed a credit equal to twenty-five (25%) of the State’s apportioned share of the federal credit claimed. The State’s apportioned share  for the taxable year. For purposes  the Code.

Proposed Law

A taxpayer is allowed a credit equal to one percent (1%) of qualified research expenses paid or accrued during the taxable year for activities conducted in this State. As used in this section, the term “qualified research expenses” has the meaning provided in Section 41 of the Code. This credit will replace all existing research credit provisions.

Explanation

Current law allows a credit for research expenditures if a credit is allowed under specific section of the Code and if a portion of the research activity occurs in North Carolina.  The Code defines the qualified expenses, the base amount and other criteria to determine if a credit is allowable for federal tax purposes.

In view of the intent of other sections of Article 3A, Tax Incentives for New and Expanding Businesses, taxpayers should be allowed to compute the research credit at a fixed percentage of amounts paid and incurred in North Carolina. The proposed change or similar proposal would accomplish this result, encourage this type of investment in the State and place this credit on par with the other incentive credits under this Article.

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Property Tax Exemptions For Construction In Progress And Product Samples

Machinery Tax And Sales Tax

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