Drop the R&D Tax Burden
© Ronald J. Parise 2005

The Constitution explicitly guarantees the protection of patents, yet today's tax structure discourages companies from utilizing this once cherished resource. The Founding Fathers wanted to protect all individual property and rights, and had the foresight to stipulate patents specifically in the Constitution. Article I, Section 8, (8) states: “To promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries.” Patent protection was put into the heart of the document, knowing that personal wealth and innovation would help a fledgling nation grow.

However, the collection of taxes on company profits was added much later (l6th Amendment, 1913). Initially Research and Development (R&D), the means by which companies invent and develop new ideas, and hence get patent protection, was allowed as an exemption directly offsetting profits, helping the bottom line. Thus companies were able to shift some of their tax burden from profits to help fund innovation. This incentive to innovate had prompted companies to beat the bushes for new ideas by purchasing patents from independent inventors (individuals and small companies), investing in their development. Large companies knew that failures were not complete financial losses due to the tax structure.

Unfortunately, and possibly to the detriment of the nation's ability to develop new ideas and technologies, the R&D exemption was completely eliminated in the early l990s. Now only those ideas from independent inventors that can immediately be put into the company product mix or appear to present an immediately lucrative opportunity get company dollars, and typically only those inventions where the sometimes very expensive prototype is built by the inventor. Other ideas, once funded with the hope of success three to five years down the road, languish on the sidelines, many times never getting developed due to a lack of funding. Only the most basic research is pursued by large companies, or more troubling, by the US government, and will not produce results for ten or fifteen years.

My niece, Ms. Cheryl McManus, Controller of a well-known international corporation, confirmed recently that all research dollars come from corporate profit. "We either pay taxes, or we pay for research. If we can't show a profit, there are no investors, and the company ceases to exist. Then we're all out of a job."

Companies will no longer bear the financial burden of developing independent ideas - the inventor must have a working model, an expense that most individuals cannot afford. So many times the technology is lost for years until the patent expires, then companies are free to use the technology. But good ideas are being lost.

The government has recognized this lack of support for small companies and individuals, and has tried to pick up the funding slack through innovation programs. But ideas that will bring products to the market in three to five years, if the government won't fund them, don't get explored. The paper work, the wait for approval, and the hoops that small companies and individuals must jump through to get the government dollars discourage some of the best ideas from ever seeing the light of day. The lost R&D tax incentive appears to have spawned other problems as well.

At a recent conference on the development of fuel cell technology, the three prime purveyors of US research - industry, national laboratories, and universities - were trying to figure out why fuel cell technology is not advancing more quickly. (The independent inventor is no longer even a part of the mix.) The general consensus is that there is a great reluctance to share information that will help to move the research effort along. But why the reluctance?

R&D dollars are now more costly, therefore companies are less willing to share information about developments until the final product is actually in the marketplace. This has eliminated a once fruitful exchange of technology and ideas, bringing fuel cell technology to a virtual standstill.

Many times legislation is put into place, which at the time seems sound, reasonable and fair. However, eliminating the R&D tax exemption may be more costly than the obvious lost company profits. The tax codes always prompt industry to think and behave in a particular way. Now companies are slighting one of the most innovative resources once utilized: small companies and the individual inventor.

Companies will always fund the long-term research that will assure success many years down the road. But what about the short-term innovations that once came from purchasing and developing patents from independent inventors that produce products in the three- to five-year time frame? The government is not the answer due to the added burden on individuals. Plus consider the ramifications of the government being the sole support of new ideas, essentially dictating the direction of corporate research! The thought is chilling.

Oh yeah, and the troubling idea that the US government is the primary financial source for new innovation. I had a conversation with a researcher from a very large US manufacturer who was interested in one of my technologies. When I explained where the technology was in terms of development, he explained, “Your technology is at too early a stage for us to look at now; the US government funds such early projects. Once you have gotten further along with government funding, please give us a call.” Since when has the US government been the sole financial source of fundamental research? I guess since the US tax structure has made it so! And I could write for days about how difficult it is for an individual to get funding for bringing new innovation to the prototype stage.

Simply put, allow the R&D tax exemption back into the tax codes to help both small businesses and individual inventors, and allow America to retain its hold on the development of new technologies.


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