To amend the Internal Revenue Code of 1986 to extend the research credit, to allow an alternative incremental research credit, and for other purposes.

SECTION 1. EXTENSION AND MODIFICATION OF RESEARCH CREDIT.

    (a) Extension.--Subsection (h) of section 41 of the Internal 
Revenue Code of 1986 (relating to credit for research activities) is 
amended--
            (1) by striking ``June 30, 1995'' each place it appears and 
        inserting ``December 31, 1997'', and
            (2) by striking ``July 1, 1995'' each place it appears and 
        inserting ``January 1, 1998''.
    (b) Base Amount for Start-up Companies.--Clause (i) of section 
41(c)(3)(B) of such Code (relating to start-up companies) is amended to 
read as follows:
                            ``(i)  Taxpayers to which subparagraph 
                        applies.--The fixed-base percentage shall be 
                        determined under this subparagraph if--
                                    ``(I) the first taxable year in 
                                which a taxpayer had both gross 
                                receipts and qualified research 
                                expenses begins after December 31, 
                                1983, or
                                    ``(II) 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.''.
    (c) Election of Alternative Incremental Credit.--Subsection (c) of 
section 41 of such Code is amended by redesignating paragraphs (4) and 
(5) as paragraphs (5) and (6), respectively, and by inserting after 
paragraph (3) the following new paragraph:
            ``(4) Election of alternative incremental credit.--
                    ``(A) In general.--At the election of the taxpayer, 
                the credit determined under subsection (a)(1) shall be 
                equal to the sum of--
                            ``(i) 1.65 percent of so much of the 
                        qualified research expenses for the taxable 
                        year as exceeds 1 percent of the average 
                        described in subsection (c)(1)(B) but does not 
                        exceed 1.5 percent of such average,
                            ``(ii) 2.2 percent of so much of such 
                        expenses as exceeds 1.5 percent of such average 
                        but does not exceed 2 percent of such average, 
                        and
                            ``(iii) 2.75 percent of so much of such 
                        expenses as exceeds 2 percent of such average.
                    ``(B) Election.--An election under this paragraph 
                may be made only for the first taxable year of the 
                taxpayer beginning after June 30, 1995. Such an 
                election shall apply to the taxable year for which made 
                and all succeeding taxable years unless revoked with 
                the consent of the Secretary.''
    (d) Increased Credit for Contract Research Expenses With Respect to 
Certain Research Consortia.--Paragraph (3) of section 41(b) of such 
Code is amended by adding at the end the following new subparagraph:
                    ``(C) Amounts paid to certain research consortia.--
                            ``(i) In general.--Subparagraph (A) shall 
                        be applied by substituting `80 percent' for `65 
                        percent' with respect to amounts paid or 
                        incurred by the taxpayer to a qualified 
                        research consortium for qualified research.
                            ``(ii) Qualified research consortium.--The 
                        term `qualified research consortium' means any 
                        organization described in subsection (e)(6)(B) 
                        if--
                                    ``(I) at least 15 unrelated 
                                taxpayers paid (during the calendar 
                                year in which the taxable year of the 
                                taxpayer begins) amounts to such 
                                organization for qualified research,
                                    ``(II) no 3 persons paid during 
                                such calendar year more than 50 percent 
                                of the total amounts paid during such 
                                calendar year for qualified research, 
                                and
                                    ``(III) no person contributed more 
                                than 20 percent of such total amounts.
                        For purposes of subclause (I), all persons 
                        treated as a single employer under subsection 
                        (a) or (b) of section 52 shall be treated as 
                        related taxpayers.''
    (e) Conforming Amendment.--Subparagraph (D) of section 28(b)(1) of 
such Code is amended by striking ``June 30, 1995'' and inserting 
``December 31, 1997''.
    (f) Effective Date.--
            (1) In general.--Except as provided in paragraph (2), the 
        amendments made by this section shall apply to taxable years 
        ending after June 30, 1995.
            (2) Subsections (c) and (d).--The amendments made by 
        subsections (c) and (d) shall apply to taxable years beginning 
        after June 30, 1995.

Summary: Amends the Internal Revenue Code to extend through December 31, 1997, the credit for increasing research activities. Modifies the fixed-base percentage for start-up companies. Allows an individual to elect an alternative incremental credit. Makes the election of such credit applicable to the taxable year in which the election is made and for all succeeding taxable years, unless it is revoked with the consent of the Secretary of the Treasury. Increases from 65 percent to 80 percent the amount for contract research expenses with respect to amounts paid or incurred by the taxpayer to qualified research consortia for qualified research.