With their eyes firmly fixed on the struggling recovery and the fate of the Bush tax cuts, business leaders aren’t showing huge enthusiasm for Mr. Obama’s proposed new package of business tax cuts and infrastructure investments, as detailed in the President’s speech in Cleveland today. That’s a pity, because there’s some good stuff here, especially in the proposed changes to the research and experimentation tax credit (aka the R&D credit).

Making the credit permanent is a long-held and well-publicized policy goal of the Administration, and would surely be a relief for companies that regularly take advantage of the tax break, giving them a more solid foundation for developing their research budgets and for tax planning.

In addition, the White House is proposing to simplify the tax break, probably by jettisoning the traditional method of calculation, which provides a 20 percent credit for investments above a certain base (the White House’s fact sheet implies that this method will be a goner, though it doesn’t out-and-out say so). At the same time, the plan would make the simplified method, which currently provides a 14 percent credit over a base amount, considerably more attractive by raising the rate to 17 percent.

Would that be enough to make a dent in what many businesses perceive as the altogether off-putting complexity of this slice of the tax code? Mike Silvio thinks it would. Silvio is managing director of the R&D tax credit group at CBIZ MHM in Irvine, Calif. The traditional method is very cumbersome, he points out; it actually makes companies go back to their records from the ’80s to construct the base amount — a difficult and expensive task at best.

The simplified method is much more manageable. “You only have to go back three years; that’s a much easier slice. Your people are usually still there three years later, and you still have the documents because typically people don’t throw documents away for about four to seven years,” he report. It’s much more doable, especially for smaller organizations with limited resources. If Congress can push the rate up to 17 percent, or, better, 20 percent, so much the better; many more companies would be willing to apply.

Another discouraging aspect of the R&D credit for many businesses is the audit risk. The IRS has classified it as a Tier 1 audit issue since 2007. But Silvio points to a series of “taxpayer-friendly” court decisions in the past year or so that have pushed back the agency’s stringent approach to determining requirements and eligibility. “The IRS has always said that you need 100 percent documentation to essentially take a position with the credit,” he notes. “These court cases have said that reasonable documentation, coupled with oral testimony and requisite knowledge of individuals at the company, is enough to sustain the credits.”

Tax services firm SourceCorp offers brief summaries of recent court cases related to R&D tax credits here. ###