[19] Both tax incentives and direct federal funding represent federal expenses. In terms of the budget, tax incentives generate tax expenditures and government revenue losses because of tax exclusions or deductions. For estimates of tax expenditures arising from the R&E tax credit, see OMB (2007).

[20] The federal credit was not in place for activities conducted from July 1995 to June 1996.

[21] For tax purposes, R&D expenses are restricted to the somewhat narrower concept of R&E expenditures (Internal Revenue Code Section 174; see also NSF/SRS [2006b]). Such expenditures are limited to experimental or laboratory costs aimed at the development or improvement of a product in connection with the taxpayer's business. Furthermore, the R&E tax-credit applies to a subset of R&E expenses based on additional statutory requirements (Internal Revenue Code Section 41).

[22] The credit was not taxable from 1981 to 1988; 50% taxable in 1989; and fully taxable since 1990.

[23] Not all R&E claims are allowed. For example, there are limitations on the reduction of total tax liabilities. Data exclude IRS tax forms 1120S (S corporations), 1120-REIT (real estate investment trusts), and 1120-RIC (regulated investment companies).

[24] For more information about the 2003 research credit, see tables in IRS (2007). These tables have additional details based on IRS tax form 4765. The return counts obtained from SOI and used in the text represent returns claiming "current year credit for increasing research" (i.e., the number of returns with a non-zero amount in line 41 of IRS tax form 4765).

[25] Differences in the structure of tax credits are important in determining effective rates (compared with statutory rates).