EXTENSION AND MODIFICATION OF RESEARCH CREDIT.

SEC. 7110. EXTENSION AND MODIFICATION OF RESEARCH CREDIT. (a) Extension.— (1) In general.—Subsection (h) of section 41 (relating to termination), as redesignated by subtitle H, is amended— 103 STAT. 2323 (A) by striking “December 31, 1989” each place it appears and inserting “December 31, 1990”, and (B) by striking “January 1, 1990” each place it appears and inserting “January 1, 1991”. (2) Special rules.— (A) In the case of any taxable year which begins before October 1, 1990, and ends after September 30, 1990, the amount treated as the qualified research expenses for such taxable year for purposes of section 41 of the Internal Revenue Code of 1986 shall be the amount which bears the same ratio to the amount which would have been determined for such taxable year without regard to this subparagraph as the number of days in such taxable year before October 1, 1990, bears to the total number of days in such taxable year before January 1, 1991. (B) In the case of a taxable year described in subparagraph (A), paragraph (2) of section 41(h) of such Code, as so redesignated, shall be applied by substituting “October 1, 1990” for “January 1, 1991” each place it appears and by substituting “September 30, 1990” for “December 31, 1990”. (3) Conforming amendment.—Subparagraph (D) of section 28(b)(1) is amended by striking “December 31, 1989” and inserting “December 31, 1990”. (b) Changes in Computation of Incremental Credit.— (1) In general.—Subsection (c) of section 41 is amended to read as follows: “(c) Base Amount.— “(1) In general.—The term ‘base amount’ means the product of— “(A) the fixed-base percentage, and “(B) the average annual gross receipts of the taxpayer for the 4 taxable years preceding the taxable year for which the credit is being determined (hereinafter in this subsection referred to as the ‘credit year’). “(2) Minimum base amount.—In no event shall the base amount be less than 50 percent of the qualified research expenses for the credit year. “(3) Fixed-base percentage.— “(A) In general.—Except as otherwise provided in this paragraph, the fixed-base percentage is the percentage which the aggregate qualified research expenses of the taxpayer for taxable years beginning after December 31, 1983, and before January 1, 1989, is of the aggregate gross receipts of the taxpayer for such taxable years. “(B) Start-up companies.— “(i) Taxpayers to which subparagraph applies.—The fixed-base percentage shall be determined under this subparagraph if there are fewer than 3 taxable years beginning after December 31, 1983, and before January 1, 1989, in which the taxpayer had both gross receipts and qualified research expenses. “(ii) Fixed-base percentage.—In a case to which this subparagraph applies, the fixed-base percentage is 3 percent. “(iii) Treatment of de minimis amounts of gross receipts and qualified research expenses.—The Secretary may prescribe regulations providing that de 103 STAT. 2324minimis amounts of gross receipts and qualified research expenses shall be disregarded under clause (i). “(C) Maximum fixed-base percentage.—In no event shall the fixed-base percentage exceed 16 percent. “(D) Rounding.—The percentages determined under subparagraph (A) shall be rounded to the nearest 1/100th of 1 percent. “(4) Consistent treatment of expenses required.— “(A) In general.—Notwithstanding whether the period for filing a claim for credit or refund has expired for any taxable year taken into account in determining the fixed-base percentage, the qualified research expenses taken into account in computing such percentage shall be determined on a basis consistent with the determination of qualified research expenses for the credit year. “(B) Prevention of distortions.—The Secretary may prescribe regulations to prevent distortions in calculating a taxpayer’s qualified research expenses or gross receipts caused by a change in accounting methods used by such taxpayer between the current year and a year taken into account in computing such taxpayer’s fixed-base percentage. “(5) Gross receipts.—For purposes of this subsection, gross receipts for any taxable year shall be reduced by returns and allowances made during the taxable year. In the case of a foreign corporation, there shall be taken into account only gross receipts which are effectively connected with the conduct of a trade or business within the United States.” (2) Conforming amendments.— (A) Subparagraph (B) of section 41(a)(1) is amended to read as follows: “(B) the base amount, and”. (B) Clause (ii) of section 41(e)(7)(C) is amended by striking “base period research expenses” and inserting “base amount”. (C) Paragraph (1) of section 41(f) (relating to aggregation of expenditures) is amended by striking “proportionate share of the increase in qualified research expenses” each place it appears and inserting “proportionate shares of the qualified research expenses and basic research payments”. (D) Subparagraph (A) of section 41(f)(3) is amended— (i) by striking “June 30, 1980” and inserting “December 31, 1983”, and (ii) by inserting before the period “, and the gross receipts of the taxpayer for such periods shall be increased by so much of the gross receipts of such predecessor with respect to the acquired trade or business as is attributable to such portion”. (E) Subparagraph (B) of section 41(f)(3) is amended— (i) by striking “June 30, 1980” and inserting “December 31, 1983”, and (ii) by inserting before the period “, and the gross receipts of the taxpayer for such periods shall be decreased by so much of the gross receipts as is attributable to such portion”. (F)(i) Subparagraph (C) of section 41(f)(3) is amended by striking “for the base period” and all that follows and 103 STAT. 2325inserting “for the taxable years taken into account in computing the fixed-base percentage shall be increased by the lesser of— “(i) the amount of the decrease under subparagraph (B) which is allocable to taxable years so taken into account, or “(ii) the product of the number of taxable years so taken into account, multiplied by the amount of the reimbursement described in this subparagraph.” (iii) The heading for such subparagraph (C) is amended to read as follows: “(C) Certain reimbursements taken into account in determining fixed-base percentage.—”. (G) Paragraph (4) of section 41(f) is amended by inserting “and gross receipts” after “qualified research expenses”. (H) Paragraph (2) of section 41(h), as redesignated by subtitle H, is amended— (i) by striking “base period expenses” in the heading and inserting “base amount”, and (ii) by striking “any amount for any base period” and all that follows through “such base period” and inserting “the base amount with respect to such taxable year shall be the amount which bears the same ratio to the base amount for such year (determined without regard to this paragraph)”. (b) Trade or Business Requirement Disregarded for In-House Research Expenses of Certain Startup Ventures.—Subsection (b) of section 41 (defining qualified research expenses) is amended by adding at the end thereof the following new paragraph: “(4) Trade or business requirement disregarded for in-house research expenses of certain startup ventures.—In the case of in-house research expenses, a taxpayer shall be treated as meeting the trade or business requirement of paragraph (1) if, at the time such in-house research expenses are paid or incurred, the principal purpose of the taxpayer in making such expenditures is to use the results of the research in the active conduct of a future trade or business— “(A) of the taxpayer, or “(B) of 1 or more other persons who with the taxpayer are treated as a single taxpayer under subsection (f)(1)”. (c) Full Disallowance of Deduction for Qualified Research Expenses.— (1) Subsection (c) of section 280C, as amended by subtitle H, is further amended by striking “50 percent of” each place it appears. (2) Paragraph (2) of section 196(d) is amended by inserting before the period “for a taxable year beginning before January 1, 1990”. (d) Only Reasonable Research Expenditures Eligible for Section 174.—Section 174 is amended by redesignating subsection (e) as subsection (f) and by inserting after subsection (d) the following new subsection: “(e) Only Reasonable Research Expenditures Eligible.—This section shall apply to a research or experimental expenditure only to the extent that the amount thereof is reasonable under the circumstances.” 103 STAT. 2326 (e) Effective Date.—The amendments made by this section (other than subsection (a)) shall apply to taxable years thinning after December 31, 1989.