If the U.S. House of Representatives and the Senate do not extend the research and development tax credit, among some other popular deductions, during the final days of the lame duck session, businesses could be big losers. If it is passed, however, businesses could look forward to a shiny new year.

Lawmakers will make one more shot this week to wrap up their work for the year. In so doing, a number of popular tax breaks stand a decent chance of being extended this week before the House and Senate close shop and head home for the remainder of the year.

The main component of the tax legislation is the research and development (R&D) credit for businesses.

Businesses could lose out significantly if Congress fails to renew the R&D tax credit, which offers a 20 percent credit for new activities. One estimate puts the value of the credit to businesses at $16.5 billion.

Chemical manufacturers and other businesses in the United States are urging Congress to pass the legislation before the end of the year to restore and expand the federal R&D tax credit.

“An expired [credit] will impose financial consequences for American chemistry and may jeopardize research projects that are essential to the American economy,” Jack N. Gerard, president of the American Chemistry Council, recently told Chemical & Engineering News.

“The R&D credit is one of the best available tools Congress has within its reach to support U.S. manufacturing,” Precision Metalforming Association (PMA) President William E. Gaskin said in an announcement yesterday. “In the face of an increasingly competitive global market, the R&D tax credit is essential for keeping American manufacturers and the U.S. economy competitive.”

The 20 percent credit would again be available for certain R&D expenditures made only in the U.S., primarily spending on employees who perform qualified research activities.

Congress has extended the R&D tax credit 11 times since it was originally enacted in 1981. Nearly 16,000 companies have used the credit.

Lawmakers have routinely extended a number of business tax breaks every year or so, including a tax credit for R&D and a break for hiring welfare recipients, as The Washington Post notes. But that routine was broken this year when leaders linked those business-tax-cut extensions to a deep and permanent cut to the estate tax, a link that Senate Majority Leader Bill Frist (R-Tenn.) had declared inviolable. As such, when the tax breaks under consideration expired at the end of 2005, they were tossed out of the $70 billion tax relief bill that passed last May to allow for the cost of extending the reduced tax rate on capital gains and dividends.

If lawmakers do vote to extend the expired breaks this week, they likely will extend them for two years beginning retroactively on Jan. 1, 2006, according to Clint Stretch, managing principal of tax policy at Deloitte Tax LLP, in a CNNMoney article yesterday.

Aides in both the House and the Senate said the extension was possible, with prospects best if the tax bill is not combined with other measures as Congress rushes to get out of town.

However, “millions of entrepreneurs, teachers and parents with kids in college have a financial stake in whether Congress, in the dying hours of Republican rule, revives tax breaks that expired 11 months ago,” The Associated Press reports, as a number of the breaks potentially included will benefit individual taxpayers:

• Above-the-line deduction for higher-education expenses
It allows deductions of up to $4,000, depending on income, for higher-education expenses in lieu of claiming other tax credits. In 2004, an estimated 4.7 million families claimed $10.7 billion in deductions for college tuition and fees.

• Above-the-line deduction for teacher classroom expenses
This allows teachers to deduct up to $250 of out-of-pocket costs incurred to purchase classroom supplies. In 2004, more than 3 million teachers took advantage of the deduction.

• A maximum credit of $2,400 for employers that hire from groups considered to face barriers to employment.

• Provision to allow taxpayers in states without income taxes to deduct state and local sales taxes.
Residents of Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming — each without an income tax — will miss out on an average $1,500 deduction for state and local sales taxes.

Congress this year sent only two of 11 spending bills — those covering the Pentagon and the Department of Homeland Security — to President George W. Bush, leaving much of the government operating under what is known as a continuing resolution, reports The New York Times. Yet Republicans will try to record some final accomplishments as they intend to adjourn by Friday, as they would like to extend these popular tax breaks rather than see Democrats get credit for restoring them next year. (House Republicans also plan to try to push through an expansion of offshore oil and gas drilling opportunities.)

Of course, even if the tax breaks are extended, the Internal Revenue Service (IRS) instructions have already been printed for 2006 — without the sales tax deduction, says HeraldNet.com.

Do you think passing of the R&D tax credit will keep American manufacturers and businesses — the U.S. economy — competitive?

Also, check out the National Association of Manufacturers (NAM)’s ShopFloor.org blog for updates on the energy bill, which is expected to be voted in “some time this week,” as this blogger is too sick to blog anymore today.