EXTENSION AND MODIFICATION OF RESEARCH CREDIT.

SEC. 104. EXTENSION AND MODIFICATION OF RESEARCH CREDIT.(a) Extension.—(1) In general.—Section 41(h)(1)(B) is amended by striking “2005” and inserting “2007”.(2) Conforming amendment.—Section 45C(b)(1)(D) is amended by striking “2005” and inserting “2007”.(3) Effective date.—The amendments made by this subsection shall apply to amounts paid or incurred after December 31, 2005.(b) Increase in Rates of Alternative Incremental Credit.—(1) In general.—Subparagraph (A) of section 41(c)(4) (relating to election of alternative incremental credit) is amended—(A) by striking “2.65 percent” and inserting “3 percent”,(B) by striking “3.2 percent” and inserting “4 percent”, and(C) by striking “3.75 percent” and inserting “5 percent”.(2) Effective date.—Except as provided in paragraph (3), the amendments made by this subsection shall apply to taxable years ending after December 31, 2006.(3) Transition rule.—(A) In general.—In the case of a specified transitional taxable year for which an election under section 41(c)(4) of the Internal Revenue Code of 1986 applies, the credit determined under section 41(a)(1) of such Code shall be equal to the sum of—(i) the applicable 2006 percentage multiplied by the amount determined under section 41(c)(4)(A) of such Code (as in effect for taxable years ending on December 31, 2006), plus(ii) the applicable 2007 percentage multiplied by the amount determined under section 41(c)(4)(A) of such Code (as in effect for taxable years ending on January 1, 2007).(B) Definitions.—For purposes of subparagraph (A)—120 STAT. 2935 (i) Specified transitional taxable year.—The term “specified transitional taxable year” means any taxable year which ends after December 31, 2006, and which includes such date.(ii) Applicable 2006 percentage.—The term “applicable 2006 percentage” means the number of days in the specified transitional taxable year before January 1, 2007, divided by the number of days in such taxable year.(iii) Applicable 2007 percentage.—The term “applicable 2007 percentage” means the number of days in the specified transitional taxable year after December 31, 2006, divided by the number of days in such taxable year.(c) Alternative Simplified Credit for Qualified Research Expenses.—(1) In general.—Subsection (c) of section 41 (relating to base amount) is amended by redesignating paragraphs (5) and (6) as paragraphs (6) and (7), respectively, and by inserting after paragraph (4) the following new paragraph:“(5) Election of alternative simplified credit.—“(A) In general.—At the election of the taxpayer, the credit determined under subsection (a)(1) shall be equal to 12 percent of so much of the qualified research expenses for the taxable year as exceeds 50 percent of the average qualified research expenses for the 3 taxable years preceding the taxable year for which the credit is being determined.“(B) Special rule in case of no qualified research expenses in any of 3 preceding taxable years.—“(i) Taxpayers to which subparagraph applies.—The credit under this paragraph shall be determined under this subparagraph if the taxpayer has no qualified research expenses in any one of the 3 taxable years preceding the taxable year for which the credit is being determined.“(ii) Credit rate.—The credit determined under this subparagraph shall be equal to 6 percent of the qualified research expenses for the taxable year.“(C) Election.—An election under this paragraph shall apply to the taxable year for which made and all succeeding taxable years unless revoked with the consent of the Secretary. An election under this paragraph may not be made for any taxable year to which an election under paragraph (4) applies.”.(2) Transition rule for deemed revocation of election of alternative incremental credit.—In the case of an election under section 41(c)(4) of the Internal Revenue Code of 1986 which applies to the taxable year which includes January 1, 2007, such election shall be treated as revoked with the consent of the Secretary of the Treasury if the taxpayer makes an election under section 41(c)(5) of such Code (as added by this subsection) for such year.(3) Effective date.—Except as provided in paragraph (4), the amendments made by this subsection shall apply to taxable years ending after December 31, 2006.(4) Transition rule for noncalendar taxable years.—120 STAT. 2936 (A) In general.—In the case of a specified transitional taxable year for which an election under section 41(c)(5) of the Internal Revenue Code of 1986 (as added by this subsection) applies, the credit determined under section 41(a)(1) of such Code shall be equal to the sum of—(i) the applicable 2006 percentage multiplied by the amount determined under section 41(a)(1) of such Code (as in effect for taxable years ending on December 31, 2006), plus(ii) the applicable 2007 percentage multiplied by the amount determined under section 41(c)(5) of such Code (as in effect for taxable years ending on January 1, 2007).(B) Definitions and special rules.—For purposes of subparagraph (A)—(i) Definitions.—Terms used in this paragraph which are also used in subsection (b)(3) shall have the respective meanings given such terms in such subsection.(ii) Dual elections permitted.—Elections under paragraphs (4) and (5) of section 41(c) of such Code may both apply for the specified transitional taxable year.(iii) Deferral of deemed election revocation.—Any election under section 41(c)(4) of the Internal Revenue Code of 1986 treated as revoked under paragraph (2) shall be treated as revoked for the taxable year after the specified transitional taxable year.