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DrQuine
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CEO
re: Viewpoint: 'The R&D credit doesn't work'
DrQuine   2/7/2012 12:24:06 AM
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G-Linden makes an excellent point that the failure of companies to link an invention to the tax credit is not significant. R&D is a long time process that doesn't tie results to a particular dollar of income or credit. That said, I've certainly seen companies on tight research budgets expend considerable effort in documenting and claiming the credit. Apparently they do think it matters.

G-Linden
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Rookie
re: Viewpoint: 'The R&D credit doesn't work'
G-Linden   2/6/2012 6:13:23 AM
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Risk is not the only source of market failure that the credit is designed to offset. A more important problem is technological spillover. Every innovation incorporated in the iPad3 or iPhone5 will be copied, invented around, or surpassed by Apple’s rivals as soon as they can manage, depriving Apple – and its suppliers -- of some of the potential returns to their innovations. Apple’s continued influence of the handset and computer industry has forced two whole industries to raise their game, something it’s hard to put a price on. Obviously Apple doesn’t “need” credits. But how many products dominate their categories in this way? The tax code cannot easily distinguish among them. Private R&D has measurable positive impacts within and across industries that bring no benefit to the firm that did the research. Business history is littered with products that were influential yet not highly profitable for the innovators. The economy-wide spillover benefits of R&D provide a much stronger reason for the credit than does the presence of market risk.

Bert22306
User Rank
CEO
re: Viewpoint: 'The R&D credit doesn't work'
Bert22306   2/6/2012 1:23:26 AM
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I'm not arguing so much about whether product development SHOULD or SHOULD NOT be included. What I'm arguing is only what the tax credit is intended for. Let me give you a simple example. When I work on a new product, my time is often spent on tasks that a customer is not yet supporting. The company pays me from an account that does not get funded by the customer. That work might involve, for example, researching the literature, writing up the way the new gizmo will work, spending time in meetings or telecons to get agreement from my peers. This qualifies. Even if I'm not working in a lab, splitting neutrinos. A lot of corporate R&D is just this sort of activity. How do you define innovation? To me, a new product that performs functions not possible with previously available products, is innovation. As to whether Apple "deserves" this tax credit, that's a different discussion. It does bug me if they take my tax dollars and send them overseas to do the work, definitely.

Bert22306
User Rank
CEO
re: Viewpoint: 'The R&D credit doesn't work'
Bert22306   2/6/2012 1:10:19 AM
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This is primarily directed at Harold Miner. Here's another explanation of what constitutes qualified R&D: -------quoting--------- http://www.journalofaccountancy.com/Issues/2010/Mar/20092122: ... The 1986 Tax Reform Act targeted the definition of qualified research with respect to which the credit is allowed. Initially, the term “qualified research” is defined as research with respect to which expenditures may be treated as expenses under section 174. In addition, section 41(d) sets forth three other requirements, some of which have been subject to extensive controversies between the IRS and taxpayers. Specifically, to constitute qualified research: The research must be undertaken for the purpose of discovering information that is technological in nature; Substantially all of the research activities must constitute a process of experimentation; and The experimentation must relate to a permitted purpose. This definition is relatively broad and encompasses such activities as: Developing new or improved products, processes or formulas; Developing prototypes or models; Developing or applying for patents; Certification testing; Developing new technology; Environmental testing; Developing or improving software technologies; Building or improving manufacturing facilities; and Streamlining internal processes. --------end quote------ Thgis is not intended only for basic research.

Harold Miner
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Rookie
re: Viewpoint: 'The R&D credit doesn't work'
Harold Miner   2/6/2012 1:07:45 AM
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Yes, today R&D is lumped together. It shouldn't and that seems to be the argument many are making, should product development qualify for the credit in the future? Is product development, in general, innovation? I'd argue that product development shouldn't. The credit's intent is to spur innovation. Companies don't need government incentive to create new products as that is the role of the market. Risk is found in research of new technologies where markets may not yet exist. Apple, for example, doesn't need incentive to create the iPad3 or iPhone5 as the marketplace drives this development. New components that are found in these devices may be a separate concern.

Bert22306
User Rank
CEO
re: Viewpoint: 'The R&D credit doesn't work'
Bert22306   2/6/2012 12:08:36 AM
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The problem is interpretation. Take a look at this: http://www.businessweek.com/small-business/the-rampd-tax-credit-explained-for-small-business-08162011_page_2.html and specifically, this: How does a company go about properly documenting its research and development expenses? "[Documentation] should be gathered while you’re actually doing [the research], even if you’re building something in a garage without a formal R&D plan. You want to keep all the diagrams you make and all the schematics, whether they are on paper or written on a napkin. Keep time sheets for anyone doing research, even if they are salaried, and note what they are working on and when. If you can document that 80 percent of a person’s activity is qualified research and development, you can utilize 100 percent of their wages for the credit." In other words, product development is part of the equation.

Bert22306
User Rank
CEO
re: Viewpoint: 'The R&D credit doesn't work'
Bert22306   2/5/2012 11:56:59 PM
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You missed the point. The tax credits are not just for pure research. They are for R&D. Which includes, for example, research into how best to incorporate emerging technologies into new products. For example, when a company develops a new codec, to be used in a new software product, that qualifies as R&D. The new codec doesn't have to be something totally unrelated to previous codecs. In fact, if you look at the way codecs work, you'll see that almost always they are further developments of what came before. But that qualifies, along with actually incorporating the codec into the new software. Product development. It's all part of R&D. I understand perfectly well what the multiplier effect is. What I am saying is that a tax break of $1 for investing in R&D does NOT have to cause the company to invest $10 in R&D, for that tax break to be effective. What must happen is that the $1 investment in R&D should create, say, $10 in increased revenue, for the R&D to have been fruitful. Even if a company's R&D amounts only to what the tax break was, and that R&D creates a good return on investment down the road, the tax credit would have been a success.

Harold Miner
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Rookie
re: Viewpoint: 'The R&D credit doesn't work'
Harold Miner   2/5/2012 9:05:38 PM
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Product development is not research. New technologies, such as the creation of Gorilla Glass and Li-ion batteries, are examples of research activities. Sure, these are products to the companies that produce them because one company's output is another input, but neither of these 'products' are destined for end-users. Incorporating Gorilla Glass and advanced batteries into a smartphone and tablets is solely product development and driven by the market forces. Investment in research activities spurs product development and grows the economy. This is an example of the multiplier effect. A multiplier of 1 is simply a jobs subsidy. Without the basic technology resulting from research the applied products for end-users can't be developed.

Bert22306
User Rank
CEO
re: Viewpoint: 'The R&D credit doesn't work'
Bert22306   2/4/2012 11:47:04 PM
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Product development is not R&D? Isn't that preposterous? In industry, the "research" half of R&D is virtually ALWAYS aimed at ultimate product development. I say "virtually" only because some major corporations do have blue sky research facilities, with theoretically no end product mandate, but it's pretty obvious why corporate funds these facilities. Basic research traditionally done in universities is great stuff, but it's hardly the end-all of R&D. Growing an economy can only come from product development.

Bert22306
User Rank
CEO
re: Viewpoint: 'The R&D credit doesn't work'
Bert22306   2/4/2012 11:24:23 PM
NO RATINGS
Far be it from me to dispute the likelihood that taxation policies don't often do what they were intended to do. It's been my contention that the government is often incompetent at picking winners and losers, and this R&D tax credit may be tangentially related, maybe. But I will dispute one point. If $1 of tax credit for R&D results in $1 of increased R&D expenditure, that's complete success. You don't expect a "multiplier effect" during this step. What you do expect is a multiplier effect from that company's investment in R&D. Meaning, every dollar invested in R&D had better result in many dollars of increased revenue downstream. And I have no reason to believe that this isn't in fact happening. The only question is, would the giants invest in R&D to the same degree, whether or not they got a tax credit? I dunno. The author claims they would. We all know that the government can throiw taxpayers' dollars down a huge assortment of "black holes," never to be seen again, so perhaps subsidizing R&D is not the worst example of waste?

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