Research and Development (R&D) is an expenditure often used to advance a company's technology or other advantageous products. R&D spending can be tracked in publicly traded companies and used to comprise the Return of Research Capital (RORC) metric. In many cases, the expenditure can also qualify for a tax write-off.
In 2012, the Research and Development (R&D) tax exemption benefit lapsed, devastating companies that relied on its support. For Amazon (NASDAQ: AMZN), the 2012 nightmare contributed to the removal of approx. 79% of their $544 million in income before tax (See Amazon Delivery Drones: An Update).
This tax benefit first appeared in 1981 as the Economic Recovery Tax Act. It has expired and become reintroduced several times. Obviously a topic of division. The recent effort from the U.S. House was to make it a permanent benefit via H.R. 4438.
The American Research and Competitiveness Act of 2014 (H.R. 4438) passed the Republican Party controlled House on May 5, 2014. It was received by the Democratic Party controlled Senate on May 12, 2014. It was there that it collected dust.
Bits and pieces of H.R. 4438 were picked up in a separate bill, H.R. 5771, aka, the Tax Increase Prevention Act of 2014. This bill passed at the last minute and prevented companies such as Amazon.com from losing R&D tax benefits for year 2014. This is no permanent fix such as the first introduced bill and will require the continued debate for 2015.
The Tax Increase Prevention Act of 2014 was different in that it coupled some of the corporate tax benefits with personal tax benefits and so on:
What does this mean for other competitors that operate similar to Amazon? Well, companies like Google (GOOG) (GOOGL) and Microsoft (NASDAQ: MSFT) do spend generously in R&D, but didn't have the same negative results in 2012. This can be explained by "better" management of additional expenses and perhaps advantageous placement of profits in other countries. For example, Apple (AAPL) does better with its ROI/RORC in addition to keeping profits abroad:
"But America isn't the only place Apple paid taxes last year. Less than half of its tax hit falls in the U.S. That's because whenever possible Apple funnels its sales and profits through overseas subsidiaries set up in countries like Ireland and the Netherlands." - Forbes (April, 2013)
Exxon Mobile (NYSE: XOM) has paid high tax rates before, but this does not appear to be connected to R&D. Exxon Mobile's issue comes to pass when tax sheltered income in low/no rate foreign countries is brought to the U.S. for operational expenses. In 2013, Forbes was tracking them as one of the highest, paying a 39% effective tax rate. First place went to ConocoPhillips (NYSE: COP) at 51.5% and second place went to Chevron (NYSE: CVX), paying 43%.
President Donald Trump put pressure on auto makers to keep manufacturing in the United States. The relationship does not appear to be completely adversarial as key CEOs later met with him at the White House for a positive meeting of the minds. Ford Motor Company claims to have canceled $1.6b for a new Mexico plant and diverted $700m towards domestic operations. The company's free cash flow (FCF) yield is strong as so is the dividend yield.
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Articles are written by Travis Brown at Seeking Alpha. Information covers stocks in the NASDAQ stock market and NYSE stock market.