BY MATT VINCENT
With the American Recovery and Reinvestment Act of 2009, i.e., the economic stimulus bill, comes a number of provisions intended to aid electronics interconnect companies, especially manufacturers of electronics assemblies and printed circuit boards. In an effort to advance these provisions, IPC – Association Connecting Electronics Industries (www.ipc.org) recently held its Capitol Hill Day event (May 6 – 8) in Washington, DC.
 |
Taking into account the recent transition of power in the U.S. government, along with the devastating downturn of global financial markets, the goal of the Capitol Hill event, according to IPC, was to “remind Congress that the electronic interconnect industry is one of the country’s most rapidly evolving industries and remains vital in rejuvenating the slumping economy.”
Fern Abrams, IPC director of GR and environmental policy, comments, “The attendees were mainly presidents and senior managers from a broad swath of our member companies. We had electronics manufacturing services companies and, I think, four of the six leading printed circuit board (PCB) companies represented.”
Attendees met with their Congressmen and, Abrams said, “had the opportunity to talk about legislative issues that we had identified as the most important issues for our industry now.”
Attending IPC member companies included: One Source Group (www. onesource-group.com); Fein-Line Associates (www. feinline.com); Logic (www.logicpd.com); Lincoln International (www. lincolninternational.com); L3 Communications (www.l-3com.com); Sanmina-SCI (www.sanmina.com); TTM Technology (www.ttmtech.com); Hallmark Circuits (www. hallmarkcircuits.com); Hunter Technology (www.hunterpcb.com); Colonial Circuits (www.colonialcircuits.com); SAIC (www.saic.com); Vulcan Flex Circuits (www.vulcanelectric.com); DDI (www.ddiglobal.com); MacDermid Inc. (www.macdermid.com); EIT (www.eit.com).
Ron Chamrin, manager of government relations for IPC, says that the association’s chief issues at this year’s Capitol Hill event were: the establishment of a permanent research and development (R&D) tax credit for electronics companies; ensuring that Congress provides adequate funding for the Department of Defense (DoD) to appoint a Printed Circuit Board (PCB) Executive Agent (EA); and lobbying for an extension of the Net Operating Loss (NOL) special tax relief, which allows businesses to offset one year’s losses against another year’s income.
Permanent R&D tax credit
“R&D is critical to the electronics industry for advancing technology, growing a business, and diversifying a product line,” says IPC’s Chamrin. The trade association contends that passage of a permanent R&D tax credit is imperative if the electronics industry is to remain competitive and retain jobs. The association recommends that Congress enact bills S. 37 and H.R. 783, which would amend the Internal Revenue Code to make permanent the credit for increasing research activities.
The tax credit is designed to stimulate company R&D over time. Further, IPC notes that R&D, as understood for tax purposes for the electronics industry, is not limited to lab activity, and that many day-to-day activities conducted in the industry can qualify for R&D tax credits. Simple items, such as discarded scrap material created as a result of modifications to a fabrication process, can be claimed for R&D tax credits, as can ongoing research and experimentation during all phases of fabrication including design, testing, compatibility, functionality, and ultimately production. Specifically, companies that qualify for the credit can deduct or subtract from corporate income taxes an amount equal to 20%.
Chamrin adds, “Traditionally, the R&D tax credit has been allowed to expire 13 times, and legislatively, it’s only allowed for a 1-year or 2-year period. And this hampers the ability of many companies to do long range R&D planning.”
Also at the Capitol Hill Day event, Chamrin reports that IPC members lobbied for an increase of the Alternative Simplified Credit (ASC) rate, an alternative method used to compute R&D tax credits that IPC believes provides an incentive to U.S. R&D spending. Companies using the ASC computation may be able to claim a credit even if they do not qualify for the traditional tax credit claims.
IPC maintains that many companies are no longer able to qualify for the traditional R&D tax credit because their R&D spending relative to gross receipts has not kept pace with the ratio set in the “base period” that governs eligibility for the regular tax credit. This can happen, for example, when a company spends less to perform the same amount of R&D because it becomes more efficient in its R&D processes.
The ASC rate currently equals 14% of the excess of current-year qualified research expenses (QREs), as defined under section 41(b) of the Internal Revenue Code of 1986–more than 50% of the taxpayer’s average QREs for the prior three years. The traditional R&D tax credit rate is 20%, whereas the ASC rate is 14%.
IPC supports an increase of the ASC rate to 20%, “to facilitate innovations necessary to compete in the global economy and solidify the number of R&D manufacturing-related jobs in the United States.” At Capitol Hill Day, IPC asked Congress to enact bill H.R. 422 that would amend the Internal Revenue Code of 1986 to extend the traditional research credit through 2010, and to increase and make permanent the alternative simplified research credit.
“President Obama and his administration have already voiced support for a permanent R&D tax credit,” concludes Chamrin. “The bill in Congress has bi-partisan support, it has our industry’s support, and it looks really, really good.”
DoD agent needs full funding
Congress recently recognized the domestic electronic supply chain’s role in national defense readiness by directing the Department of Defense (DoD) to appoint a printed circuit board (PCB) executive agent (EA). The EA is a senior level official directed to create DoD policy addressing counterfeit parts vulnerability, advanced technological capabilities, and manufacturing capacity, under the incumbent authority of the Secretary of Defense. Congress mandated that the EA be appointed by January 2009; however, as of May, the EA position was still vacant, and unfunded.
“The DoD is trying to adhere to the law, but they don’t have funding to support the agent,” notes IPC’s Chamrin.
IPC maintains that contemporary DoD trends regarding the electronics industry have resulted in a reduction of defense-specific purchasing, and that the DoD may not fully comprehend the ramifications of dwindling numbers of domestic PCB manufacturers capable of supporting DoD requirements for innovative technology. The association adds that the DoD’s substantially increased use of commercial off-the-shelf (COTS) electronics has resulted in a shift from DoD’s dependence on domestic defense electronics suppliers to a dependence on the global consumer market.
According to IPC, this has led to a reduction of the number of domestic PCB manufacturers able to meet the DoD’s future needs. The affect of these trends has resulted in susceptibility of the DoD to counterfeit parts, unreliable components, and a potential lack of technological expertise.
“Sourcing off-the-shelf components, bypassing PCB fabricators, and changing requirements that remove ITAR, or international trade and arms regulations, and other specifications, for domestic PCB manufacturers, now enable these PCBs to be manufactured all across the world,” adds Chamrin. “Congress has recognized that this is a crisis.”
At Capitol Hill Day, IPC stressed to Congressional leaders: that the EA is critically needed to ensure that DoD has access to the PCB manufacturing capabilities to meet future military requirements; that direct funding is needed to properly staff and fully support the EA to carry out the duties tasked by Congress; and that a lack of funding severely hinders DoD’s ability to support this program.
Chamrin concludes, “We want the executive agent to be powerful, highly visible, to have full access to all the branches of the DoD, and to be accessible to the North American PCB industry,” says Charmin.
Tax relief
Net Operating Loss (NOL) is a special tax relief that allows businesses to offset one year’s losses against another year’s income. The NOL refunds, also known as carry backs, provide immediate cash for companies to fund operations, make needed investments and, in some cases, stay open for business.
The National Association of Manufacturers (NAM; www.nam.org) contends that, in the current economic recession, manufacturers of all sizes in many industry sectors are falling into a “net operating loss” position where losses exceed income; and further, that the U.S. tax code has long recognized that business cycles include natural fluctuations in a company’s loss and profits from year to year.
As economic recessions exacerbate downward business cycles, NAM notes that the tax code generally allows companies to carry back NOLs for two years to offset federal income taxes paid in recent profitable years. Companies can obtain refunds for those earlier tax payments (while NOLs can be carried forward for 20 years, carry forwards are not helpful to struggling companies).
The 2009 economic stimulus bill initially provided NOL relief for businesses with gross annual receipts of $15 million or less. Congress earlier this year provided a temporary extension of the NOL carry back period from two to five years for 2008 NOLs, as part of the economic stimulus bill. This relief was included in the Senate-passed economic recovery bill, and similar relief was included in House-passed H.R. 1. As recently enacted into law, H.R. 1 provided a 5-year carry back for 2008 NOLs, but arbitrarily limited the relief to small companies with annual gross receipts of $15 million or less.
IPC, along with NAM, argues that the $15 million threshold of NOL relief is arbitrary, excludes medium and large-sized business, and should be eliminated; and that follow-on relief is needed so that companies of all sizes can benefit. The trade associations believe that Congress should enact S. 823, The Net Operating Loss Carryback Act, that would expand current law to include small, medium and large-sized companies. “In this current recession, in a very, very tight capital market, NOL relief that we are seeking can result in preserving jobs, because it can get cash back into the hand of companies, particularly at a time when the credit markets are so very tight,” explains Monica McGuire, chairman of the NOL coalition in Washington, D.C., and senior policy director, taxation, for NAM.
“The tight credit market has significantly reduced traditional business lending, so NOL tax credits can provide a much needed alternative source of capital,” adds IPC’s Chamrin. “What happens is that when you file for NOL relief, you get the cash back in the form of a tax refund.”
Restoring relief?
IPC explains that a NOL generally occurs when a company has incurred more expenses than revenues during a taxable period. A NOL is the amount by which deductions exceed gross taxable income, resulting in a negative taxable income. Eligible companies can receive tax refunds by applying NOLs to taxes during the previous five years. Companies also have the option of carrying the loss forward 20 years to future income tax payments, thereby reducing payments they will need to make in future periods.
“In the stimulus law that was enacted this February, at the very last minute, NOL relief was pared back very abruptly to exclude medium and large sized companies, and so the coalition is working hard to get that relief restored in any ‘must pass’ legislation that Congress will address,” explains NAM’s McGuire.
She concludes, “You just keep pounding the pavement, being squeaky, to keep generating addi- tional support for this relief. That’s what it takes to get legislation enacted into law, so that’s what we’re doing. I would predict that more companies might be interested in this NOL relief, if the economy does not improve.” CS
