Tax reform is likely to curtail some credits and incentives.

AuthorSchechter, Talia

With the inauguration of President Donald Trump and Republicans in control of the House of Representatives and the Senate, it is likely that a combination of Trump's campaign tax proposals and House Republicans' tax proposals will come together in a legislative package in 2017. Consequently, many tax professionals are eager to learn how the expected tax reform package will affect their own taxes and those of their clients.

At the top of the list of tax reform proposals is a substantial reduction in corporate tax rates and a reduction in the individual tax rates applied to business income from flowthrough entities. Another anticipated reform concerns the business tax structure. In addition to lowering business tax rates, other anticipated changes include the repeal of the corporate and individual alternative minimum taxes and the elimination of many business tax expenditures.

A common tactic used in tax reform to offset revenue lost from tax rate reductions is to broaden the tax base by eliminating certain "special interest" tax breaks. This means there are, inevitably, winners and losers as credits and incentives that benefit certain industries are reduced or eliminated. Following is a discussion of several popular tax credits and incentives and their potential future in light of the latest tax reform proposals.

Sec. 41: Research and development tax credit

The research and development (R&D) tax credit is a federal incentive that encourages businesses to invest in technological innovation for products or processes developed within the United States. Businesses engaged in qualified research activities can use the credit to offset their regular federal tax liability, as well as state tax liabilities if the qualified research is performed within states that offer similar incentives. Currently, 38 states offer research credits, many of which are similar to the federal R&D tax credit.

While Trump and many Republicans in Congress favor reducing corporate tax expenditures, the R&D tax credit is one provision that does not seem to be in danger of elimination. Both Trump and House Republicans have stated that they would maintain the R&D tax credit.

With a Republican administration in place, many believe the R&D tax credit may be in line for expansion or improved efficiencies. Enhancements to the credit may include:

* Increasing the alternative simplified credit rate from 14%;

* Increasing the qualified research percentage of contract research...

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