I 
110TH CONGRESS 
2D SESSION 
H. R. 5681 
To amend the Internal Revenue Code of 1986 to provide incentives to improve 
America’s research competitiveness, and for other purposes. 
IN THE HOUSE OF REPRESENTATIVES 
APRIL 2, 2008 
Mr. MCNERNEY introduced the following bill; which was referred to the 
Committee on Ways and Means 
A BILL 
To amend the Internal Revenue Code of 1986 to provide 
incentives to improve America’s research competitiveness, 
and for other purposes. 
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled, 
SECTION 1. SHORT TITLE. 
This Act may be cited as the ‘‘Innovation Tax Credit 
Act of 2008’’. 
SEC. 2. SIMPLIFICATION OF RESEARCH AND DEVELOP-
MENT CREDIT. 
(a) TRANSITION
TO
FULLY-IMPLEMENTED
SIM-
PLIFIED
CREDIT
FOR
QUALIFIED
RESEARCH
EX-
PANSES.— 
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(1) PHASE-OUT
OF
TRADITIONAL
CREDIT.— 
Section 41(a) of the Internal Revenue Code of 1986 
is amended— 
(A) by striking ‘‘20 percent’’ each place it 
appears and inserting ‘‘the applicable percent-
age’’, and 
(B) by adding at the end the following new 
flush sentence: 
‘‘For purposes of this subsection, the term ‘applicable per-
centage’ means 20 percent with respect to taxable years 
beginning in 2008 and 2009.’’. 
(2) PHASE-IN OF SIMPLIFIED CREDIT.—Section 
41(c)(5)(A) of such Code is amended— 
(A) by striking ‘‘12 percent’’ and inserting 
‘‘the applicable percentage’’, and 
(B) by adding at the end the following new 
sentence: ‘‘For purposes of the preceding sen-
tence, the term ‘applicable percentage’ means 
16 percent with respect to taxable years begin-
ning in 2008 and 18 percent with respect to 
taxable years beginning in 2009’’. 
(3) EFFECTIVE DATE.—The amendments made 
by this subsection shall apply to taxable years begin-
ning after December 31, 2007. 
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(b) FULLY-IMPLEMENTED SIMPLIFIED CREDIT FOR 
QUALIFIED RESEARCH EXPENSES.— 
(1) IN GENERAL.—Subsection (a) of section 41 
of the Internal Revenue Code of 1986 (relating to 
credit for increasing research activities) is amended 
to read as follows: 
‘‘(a) DETERMINATION OF CREDIT.— 
‘‘(1) IN GENERAL.—For purposes of section 38, 
the research credit determined under this section for 
the taxable year shall be equal to 20 percent of so 
much of the qualified research expenses for such 
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. 
‘‘(2) SPECIAL RULE IN CASE OF NO QUALIFIED 
RESEARCH EXPENSES IN ANY OF 3 PRECEDING TAX-
ABLE YEARS.— 
‘‘(A) TAXPAYERS TO WHICH PARAGRAPH 
APPLIES.—The credit under this section shall 
be determined under this paragraph if the tax-
payer has no qualified research expenses in at 
least 1 of the 3 taxable years preceding the tax-
able year for which the credit is being deter-
mined. 
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‘‘(B) CREDIT
RATE.—The credit deter-
mined under this paragraph shall be equal to 
10 percent of the qualified research expenses 
for the taxable year.’’. 
(2) CONFORMING AMENDMENT.—Section 41 of 
such Code is amended by striking subsection (c). 
(c) UNIFORM REIMBURSEMENT RATES
FOR ALL 
CONTRACT
RESEARCH
EXPENSES
OTHER
THAN 
AMOUNTS PAID FOR BASIC RESEARCH.— 
(1) IN GENERAL.—Section 41(b)(3) of the In-
ternal Revenue Code of 1986 (relating to contract 
research expenses) is amended— 
(A) by striking ‘‘65 percent’’ and inserting 
‘‘80 percent’’, and 
(B) by striking subparagraphs (C) and 
(D). 
(2) 
BASIC
RESEARCH
PAYMENTS.—Section 
41(b) of such Code is amended by redesignating 
paragraph (4) as paragraph (5) and by inserting 
after paragraph (3) the following new paragraph: 
‘‘(4) BASIC RESEARCH PAYMENTS.— 
‘‘(A) IN GENERAL.—In the case of basic 
research payments by the taxpayer, paragraph 
(3)(A) shall be applied by substituting ‘100 per-
cent’ for ‘80 percent’. 
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‘‘(B) BASIC
RESEARCH
PAYMENTS
DE-
FINED.—For purposes of this paragraph— 
‘‘(i) IN
GENERAL.—The term ‘basic 
research payment’ means, with respect to 
any taxable year, any amount paid in cash 
during such taxable year by a corporation 
to any qualified organization for basic re-
search but only if— 
‘‘(I) such payment is pursuant to 
a written agreement between such cor-
poration and such qualified organiza-
tion, and 
‘‘(II) such basic research is to be 
performed by such qualified organiza-
tion. 
‘‘(ii) EXCEPTION
TO
REQUIREMENT 
THAT RESEARCH BE PERFORMED BY THE 
ORGANIZATION.—In the case of a qualified 
organization described in clause (iii) or (iv) 
of subparagraph (C), subclause (II) of 
clause (i) shall not apply. 
‘‘(C) 
QUALIFIED
ORGANIZATION.—For 
purposes of this paragraph, the term ‘qualified 
organization’ means any of the following orga-
nizations: 
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‘‘(i) EDUCATIONAL
INSTITUTIONS.— 
Any educational organization which— 
‘‘(I) is an institution of higher 
education (within the meaning of sec-
tion 3304(f)), and 
‘‘(II) is described in section 
170(b)(1)(A)(ii). 
‘‘(ii) CERTAIN SCIENTIFIC RESEARCH 
ORGANIZATIONS.—Any 
organization 
not 
described in clause (i) which— 
‘‘(I) 
is 
described 
in 
section 
501(c)(3) and is exempt from tax 
under section 501(a), 
‘‘(II) is organized and operated 
primarily to conduct scientific re-
search, and 
‘‘(III) is not a private founda-
tion. 
‘‘(iii) SCIENTIFIC TAX-EXEMPT ORGA-
NIZATIONS.—Any organization which— 
‘‘(I) 
is 
described 
in 
section 
501(c)(3) (other than a private foun-
dation) or section 501(c)(6), 
‘‘(II) is exempt from tax under 
section 501(a), 
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‘‘(III) is organized and operated 
primarily to promote scientific re-
search by qualified organizations de-
scribed in clause (i) pursuant to writ-
ten research agreements, and 
‘‘(IV) currently expends substan-
tially all of its funds or substantially 
all of the basic research payments re-
ceived by it for grants to, or contracts 
for basic research with, an organiza-
tion described in clause (i). 
‘‘(iv) 
CERTAIN
GRANT
ORGANIZA-
TIONS.—Any organization not described in 
clause (ii) or (iii) which— 
‘‘(I) 
is 
described 
in 
section 
501(c)(3) and is exempt from tax 
under section 501(a) (other than a 
private foundation), 
‘‘(II) is established and main-
tained by an organization established 
before July 10, 1981, which meets the 
requirements of subclause (I), 
‘‘(III) is organized and operated 
exclusively for the purpose of making 
grants to organizations described in 
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clause (i) pursuant to written research 
agreements for purposes of basic re-
search, and 
‘‘(IV) makes an election, rev-
ocable only with the consent of the 
Secretary, to be treated as a private 
foundation for purposes of this title 
(other than section 4940, relating to 
excise tax based on investment in-
come). 
‘‘(D) DEFINITIONS AND SPECIAL RULES.— 
For purposes of this paragraph— 
‘‘(i) BASIC
RESEARCH.—The term 
‘basic research’ means any original inves-
tigation for the advancement of scientific 
knowledge not having a specific commercial 
objective, except that such term shall not 
include— 
‘‘(I) basic research conducted 
outside of the United States, and 
‘‘(II) basic research in the social 
sciences, arts, or humanities. 
‘‘(ii) TRADE OR BUSINESS QUALIFICA-
TION.—For purposes of applying para-
graph (1) to this paragraph, any basic re-
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