Tax Policy:

Information on the Research Tax Credit

T-GGD-95-140: Published: Apr 3, 1995. Publicly Released: Apr 3, 1995.

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GAO discussed the research tax credit. GAO noted that: (1) in tax year 1992, corporations earned slightly over $1.5 billion in research tax credits; (2) most of the corporations were large manufacturers of chemicals, electronic machinery, motor vehicles, and nonelectronic machinery; (3) there is no estimate of the net benefit to society of the additional research the credit has stimulated; (4) the credit's fixed base can become too generous for some taxpayers, which results in revenue losses, and too restrictive for other taxpayers, which results in less research stimulation; (5) if the credit is extended, the base may need to be adjusted to better reflect the corporations' actual research spending behavior; (6) the Internal Revenue Service's administration of the credit has been difficult, mostly due to an unclear definition of qualified research spending; and (7) although recent regulations may resolve this uncertainty, the difficulty of distinguishing between innovative and routine research remains.

Matter for Congressional Consideration

  1. Status: Closed - Not Implemented

    Comments: Congress has repeatedly extended the life of the research tax credit during the 1990s. In 1996, Congress added an alternative credit computation method for taxpayers that could not earn a credit under the regular computation method; however, other potential problems relating to the credit's base have not been addressed or studied in depth. The Omnibus Consolidated and Emergency Supplemental Appropriations Act of 1998 extended the credit through June 30, 1999, with no change in the credit. The Ticket to Work and Work Incentives Act of 1999 extended the credit through June 30, 2004, raised the rates of the alternative incremental credit, and extended the credit to cover research conducted in Puerto Rico.

    Matter: If Congress decides to extend the credit, it may also want to ensure that the credit continues to provide an attractive incentive to most recipients at an acceptable revenue cost. One way this could be done is by requiring that the base be reviewed periodically and adjusted as needed.


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