But on two issues there is little, if any, disagreement: (1) the impact of technological innovation on economic growth in the long run and (2) the proper role of government in the development and commercial uses of new technologies. As a remedy for this failure, most economists recommend the adoption of public policies aimed at boosting or supplementing private investment in R&D. Federal tax law offers two such incentives: (1) an expensing allowance for qualified research expenditures (QREs) under Section 174 of the Internal Revenue Code (IRC), and (2) a non-refundable tax credit for QREs above a base amount under IRC Section 41—also known as the research and experimentation (R&E) tax credit, the research tax credit, the R&D tax credit, or the credit for increasing research activities. This report examines the current status of the R&E tax credit, describes its legislative history, and discusses some of the key policy issues raised by the current credit. But it actually has four discrete components: a regular research credit, an alternative simplified credit (ASC), a basic research credit, and a credit for energy research. Regular Research Credit

The regular research tax credit was extended 16 times before the PATH Act permanently extended it. There is evidence that business R&D investment is responsive to reductions in its after-tax cost. The base amount for the regular credit is supposed to approximate how much a firm would spend on qualified research in the absence of the credit. 3. 4. After years of being a temporary provision, the 114 th Congress permanently extended the credits, starting with the 2015 tax year, through the Protecting Americans from Tax Hikes Act of 2015 (PATH Act, P.L. 114-113 ). As a result, analysts have relied on two other measures of effectiveness: (1) the amount of business R&D investment in a given year that can be attributed to the research credit and (2) the added R&D induced by one dollar of the credit. Uneven and Inadequate Incentive Effects

A tax subsidy's incentive effect refers to the magnitude of the benefit it offers eligible taxpayers. Critics contend that the credit's lack of refundability can pose a special problem for small young firms that invest heavily in R&D relative to their income. Ambiguity and Uncertainty in the Definition of Qualified Research and QREs

Some critics maintain that another reason the current research tax credit's incentive effect is not as robust as it could or should be lies in the many disputes in each tax year between the IRS and companies claiming the credit over the definition of qualified research and the expenditures that qualify for the credit. They departed in some significant ways from previous guidance.
Technological innovation is a primary engine of long-term economic growth, and research and development (R&D) serves as the lifeblood of innovation. The federal government encourages private investment in R&D in several ways, including a tax credit for increases in spending on qualified research above a base amount.
This report describes the current status of the credit, summarizes its legislative history, and discusses policy issues it raises.
The research tax credit (also known as the research and experimentation (or R&E) tax credit) was permanently extended in 2015. Since its enactment in mid-1981, the credit was temporarily extended 16 times and significantly modified 5 times.
While the credit is often thought of as a single credit, it actually consists of four discrete credits: (1) a regular credit, (2) an alternative simplified credit (ASC), (3) a university basic research credit, and (4) an energy research credit. A taxpayer may claim one of the first two and each of the other two, provided it meets the requirements for each.
In essence, the research credit endeavors to boost business investment in basic and applied research by reducing the after-tax cost of undertaking qualified research above a base amount, which approximates the amount a company would invest in R&D in the absence of the credit. As a result, the credit's effectiveness hinges, in part, on the sensitivity of the demand for this research to decreases in its cost. It is unclear from existing studies exactly how sensitive that demand is.
While most analysts endorse the use of tax incentives to generate ever-higher levels of business R&D investment, some have some reservations about the design of the current credit. Critics contend that it is not as effective as it could or should be, given the economic benefits of technological innovation. The limits on the credit's effectiveness, in their view, include uneven and inadequate incentive effects, a lack of refundability, and an ambiguous definition of qualified research that fosters disputes between the Internal Revenue Service and companies over the legitimacy of claims for the credit.
The 114th Congress permanently extended the research tax credit by passing the Protecting Americans from Tax Hikes Act of 2015 (PATH Act, P.L. 114-113). The act also allowed certain small firms to apply up to $250,000 of any credit they may claim against their payroll taxes in a tax year.