Bailout Brings a Little Credit for Research

It's understandable if you missed it. Shoved into the middle of the massive bailout bill that became law last Friday, on page 270 of 451 pages, was an extension of the research and development tax credit. The tax credit expired at the end of last year, but this law reinstates it for this year and extends it through the end of 2009.

I know what you're thinking: "Big deal." But it really is.

The tax credit covers up to 20% of qualified research and development spending. From high-tech companies like Microsoft (Nasdaq: MSFT) and Intel (Nasdaq: INTC) to pharmaceutical companies like Pfizer (NYSE: PFE) and Johnson & Johnson (NYSE: JNJ), and even to Harley-Davidson (NYSE: HOG), the tax credit cumulatively adds $7 billion each year to companies' coffers. Sure, it's no $700 billion bailout, but that's not chump change, either.

Ironically, the companies that could use the cash the most are unprofitable ones like Advanced Micro Devices (NYSE: AMD) and Exelixis (Nasdaq: EXEL), but they won't benefit nearly as much. Because they're not paying income taxes, the tax credits just carry over from year to year.

The expiration of the credit and relatively short extension has to be frustrating for companies. This is the 13th time that Congress has extended the credit since it was set up in 1981. Research and development is the lifeblood of many industries, and most companies likely factor it into the decision on whether to begin work on a project.

Just like tax deductions that you and I get, this tax credit isn't a reason to go out and spend money in and of itself. But, because the companies were likely to spend the money anyway, the gift to industries not directly in need of a bailout should be a welcome benefit.