Government support for private investment in R&D is useful to correct a market failure that predisposes a company to invest less than the overall economic benefits from R&D investments would warrant. Since most companies are unable to capture all the returns on their R&D investments support in the form of tax incentives for business R&D investments is provided that would allow for a full expensing allowance for qualified research expenditures, but no patent box, to partially compensates companies for the returns that spill over to other actors like competing companies.
The current federal tax code allows for a tax credit under Section 41 and the option to expense qualified research expenditures under Section 174 for R&D investments. There are critics of both and some believe increased investments in innovation would occur if one targeted the profits from business R&D investments instead of the cost inputs thus the patent box also known as an innovation or intellectual property(IP) box.
The three patent box goals are to (1) increase tax revenue by encouraging the repatriation of intellectual property (IP) held abroad and discouraging domestic companies from transferring IP to foreign subsidiaries in low-tax countries; (2) expand domestic innovative activities; and (3) stimulate growth in domestic high-paying jobs.
A patent box takes into account the nature of the tax subsidy it offers and the scope of its application. Typically, the tax subsidy is either a deduction or exemption from a company’s gross income or a preferential tax rate for qualified intellectual property (IP) income. The scope considers the kinds of IP and IP-related income that qualify for the tax subsidy.
The two industries that obtain patents more than others are the chemical manufacturing and computer /electronics manufacturing. Therefore, these would reap the most benefit from a patent box. Whether the United States should consider this type of arrangement as the Congress considers federal tax reform and join 16 other countries that offer it is not clear.
The CRS report is available for download: https://fas.org/sgp/crs/misc/R44829.pdf