The House today passed a bill to extend the research tax credit for one year. While most business leaders would welcome the extension if it makes it through the Senate, small companies – currently in desperate need of a bit of tax relief — would have little to celebrate, judging by a report released Sunday by the Government Accountability Office. Big companies hog most of the tax break’s benefits, the GAO reveals.

The report looked at returns for 2003 through 2005, and found that more than 15,000 corporate taxpayers claimed the credit in each of those years. But large companies did much better than small organizations. In 2005, for example, just 549 companies with annual revenue above $1 billion accounted for about 65 percent of the total $6 billion worth of net credit. Even within that group, credit use was concentrated among the largest taxpayers.

Small businesses, just like big ones, have to continually develop new products, which means pouring money into the expense categories covered by the credit (mainly supplies, as well as wages or payments to contractors for qualified research). Why they’re less successful than their larger competitors in capitalizing on the tax break is unclear. Part of the problem may be just lack of knowledge; many firms “don’t realize that they actually do things that qualify for the credit,” the report notes.

Another snag is the intimidating complexity of the rules governing the credit. The GAO is calling on Treasury to ease the computational methods and to clarify the definition of gross receipts and treatment of inventory.

All eyes this week have been on the perilous state of America’s smaller businesses, with the emphasis on short-term fixes ranging from hiring incentives to a payroll tax holiday, to reducing capital gains on small company stocks. All well and good, but in the longer-term view, an overhaul of the research credit to make it friendlier to small firms could be a significant economic booster. ###