To amend the Internal Revenue Code of 1986 to allow an increased credit for development and to extend and simplify the credit for increasing research.

SECTION 1. CREDIT FOR INCREASING DEVELOPMENT ACTIVITIES.

    (a) In General.--Subpart D of part IV of subchapter A of chapter 1 
of the Internal Revenue Code of 1986 is amended by inserting after 
section 41 the following new section:

``SEC. 41A. CREDIT FOR INCREASING DEVELOPMENT ACTIVITIES.

    ``(a) In General.--For purposes of section 38, at the election of 
the taxpayer, the development credit determined under this section for 
the taxable year shall be an amount equal to 30 percent of so much of 
the qualified development expenses for the taxable year as exceeds 50 
percent of the average qualified development expenses for the 3 taxable 
years preceding the taxable year for which the credit is being 
determined.
    ``(b) Qualified Development Expenses.--For purposes of this 
section--
            ``(1) In general.--The term `qualified development 
        expenses' means the sum of the following amounts which are paid 
        or incurred during the taxable year in carrying on any trade or 
        business of the taxpayer:
                    ``(A) Any in-house development expenses.
                    ``(B) Any contract development expenses.
            ``(2) In-house development expenses; contract development 
        expenses.--The terms `in-house development expenses' and 
        `contract development expenses' shall have the respective 
        meaning given such terms in paragraphs (2) and (3) of section 
        41(b), except such paragraphs shall be applied by substituting 
        `qualified development' for `qualified research'.
    ``(c) Qualified Development.--The term `qualified development' 
means the systematic application of knowledge or understanding directed 
toward the production of useful material, devices, and systems or 
methods, including design, development, and improvement of prototypes 
and new processes to meet specific requirements. For purposes of the 
preceding sentence the rules of subparagraphs (A), (B), and (C) of 
section 41(d)(1) shall apply with respect to any development taken into 
account under this section.
    ``(d) Special Rule in Case of No Qualified Development Expenses in 
Any of 3 Preceding Years.--
            ``(1) Taxpayers to which this subparagraph applies.--The 
        credit under this section shall be determined under this 
        subsection if the taxpayer has no qualified development 
        expenses in any one of the 3 taxable years preceding the 
        taxable year for which the credit is being determined.
            ``(2) Credit rate.--The credit determined under this 
        subparagraph shall be equal to 12 percent of the qualified 
        development expenses for the taxable year.
    ``(e) Election.--An election under this section shall apply to the 
taxable year for which made and all succeeding taxable years unless 
revoked with the consent of the Secretary.
    ``(f) Other Special Rules.--Rules similar to the rules of 
subsections (d)(4), (f), and (g) of section 41 shall apply for purposes 
of this section.
    ``(g) Termination.--This section shall not apply to taxable years 
beginning after December 31, 2018.''.
    (b) Coordination With Section 41.--Subsection (b) of section 41 of 
such Code is amended by adding at the end the following new paragraph:
            ``(5) Coordination with section 41a.--In the case of any 
        taxable year for which an election is in effect under section 
        41A, for purposes of determining the amount of qualified 
        research expenses for such taxable year and the fixed-base 
        percentage with respect to such taxable year, qualified 
        research expenses shall not include any qualified development 
        expenses (as defined in subsection (b) of such section).''.
    (c) Coordination With Deductions.--Section 280C is amended by 
adding at the end the following new subsection:
    ``(j) Credit for Increasing Development Activities.--
            ``(1) In general.--No deduction shall be allowed for that 
        portion of the qualified development expenses (as defined in 
        section 41A(b)) otherwise allowable as a deduction for the 
        taxable year which is equal to the amount of the credit 
        determined for such taxable year under section 41A(a).
            ``(2) Similar rule where taxpayer capitalizes rather than 
        deducts expenses.--If--
                    ``(A) the amount of the credit determined for the 
                taxable year under section 41A(a), exceeds
                    ``(B) the amount allowable as a deduction for such 
                taxable year for qualified development expenses 
                (determined without regard to paragraph (1)),
        the amount chargeable to capital account for the taxable year 
        for such expenses shall be reduced by the amount of such 
        excess.
            ``(3) Election of reduced credit.--
                    ``(A) In general.--In the case of any taxable year 
                for which an election is made under this paragraph--
                            ``(i) paragraphs (1) and (2) shall not 
                        apply, and
                            ``(ii) the amount of the credit under 
                        section 41A(a) shall be the amount determined 
                        under subparagraph (B).
                    ``(B) Amount of reduced credit.--The amount of 
                credit determined under this subparagraph for any 
                taxable year shall be the amount equal to the excess 
                of--
                            ``(i) the amount of credit determined under 
                        section 41A(a) without regard to this 
                        paragraph, over
                            ``(ii) the product of--
                                    ``(I) the amount described in 
                                clause (i), and
                                    ``(II) the maximum rate of tax 
                                under section 11(b)(1).
                    ``(C) Election.--An election under this paragraph 
                for any taxable year shall be made not later than the 
                time for filing the return of tax for such year 
                (including extensions), shall be made on such return, 
                and shall be made in such manner as the Secretary may 
                prescribe. Such an election, once made, shall be 
                irrevocable.
            ``(4) Controlled groups.--Paragraph (3) of subsection (b) 
        shall apply for purposes of this subsection.''.
    (d) Part of General Business Credit.--Subsection (b) of section 38 
of such Code is amended by striking ``plus'' at the end of paragraph 
(35), by striking the period at the end of paragraph (36) and inserting 
``, plus'', and by adding at the end the following new paragraph:
            ``(37) the development credit determined under section 
        41A.''.
    (e) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2013.

SEC. 2. INCREASE IN ALTERNATIVE SIMPLIFIED CREDIT FOR RESEARCH.

    (a) In General.--Subparagraph (A) of section 41(c)(5) of the 
Internal Revenue Code of 1986 is amended by striking ``14 percent (12 
percent in the case of taxable years ending before January 1, 2009)'' 
and inserting ``20 percent''.
    (b) Special Rule in Case of No Qualified Research Expenses in Any 
of 3 Preceding Taxable Years.--Clause (ii) of section 41(c)(5)(B) of 
such Code is amended by striking ``6 percent'' and inserting ``8 
percent''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2013.

SEC. 3. EXTENSION OF CREDIT FOR INCREASING RESEARCH ACTIVITIES.

    (a) In General.--Subparagraph (B) of section 41(h)(1) of the 
Internal Revenue Code of 1986 is amended by striking ``December 31, 
2013'' and inserting ``December 31, 2018''.
    (b) Effective Date.--The amendment made by this section shall apply 
to amounts paid or incurred after December 31, 2013.

Summary: Amends the Internal Revenue Code to: (1) allow through 2018 a new business-related tax credit for an increase in expenditures for qualified development expenses (defined as the sum of any in-house and contract development expenses incurred in the trade or business of a taxpayer), (2) increase to 20% the rate of the alternative simplified research tax credit, and (3) extend through 2018 the tax credit for increasing research activities.