It is enacted by the General Assembly as follows

SECTION 1. Sections 44-32-2 and 44-32-3 of the General Laws in Chapter 44-32 entitled "Elective Deduction for New Research and Development Facilities" is hereby amended to read as follows:

44-32-2. Credit for research and development property acquired, constructed, or reconstructed or erected after July 1, 1994. -- (a) A taxpayer shall be allowed a credit against the tax imposed by chapters 44-11 or 44-30. The amount of the credit shall be ten percent (10%) of the cost or other basis for federal income tax purposes of tangible personal property, and other tangible property, including buildings and structural components of buildings, described in subsection (b) of this section; acquired, constructed or reconstructed, or erected after July 1, 1994.

(b) A credit shall be allowed under this section with respect to tangible personal property and other tangible property, including buildings and structural components of buildings which are: depreciable pursuant to 26 U.S.C. section 167 or recovery property with respect to which a deduction is allowable under 26 U.S.C. section 168, have a useful life of three (3) years or more, are acquired by purchase as defined in 26 U.S.C. section 179(d), have a situs in this state and are used principally for purposes of research and development in the experimental or laboratory sense. The credit shall be allowable in the year the property is first placed in service by the taxpayer, which is the year in which, under the taxpayer's depreciation practice, the period for depreciation with respect to the property begins, or the year in which the property is placed in a condition or state of readiness and availability for a specifically assigned function, whichever is earlier. Such purposes shall not be deemed to include the ordinary testing or inspection of materials or products for quality control, efficiency surveys, management studies, consumer surveys, advertising, promotions, or research in connection with literary, historical or similar projects.

(c) A taxpayer shall not be allowed a credit under this section with respect to any property described in subsections (a) and (b) of this section, if a deduction is taken for such property under section 44-32-1.

(d) A taxpayer shall not be allowed a credit under this section with respect to tangible personal property and other tangible property, including buildings and structural components of buildings, which it leases to any other person or corporation. For purposes of the preceding sentence, any contract or agreement to lease or rent or for a license to use such property shall be considered a lease.

(e) The credit allowed under this section for any taxable year shall not reduce the tax due for such year, in the case of corporations, to less than the minimum fixed by section 44-11-2(e). However, if the amount of credit allowable under this section for any taxable year {DEL reduces the tax to the minimum fixed by section 44-11-2 (e) DEL} {ADD is less than the amount of credit available to the taxpayer ADD} , any amount of credit not credited in such taxable year may be carried over to the following year or years, up to a maximum of seven (7) years, and may be credited against the taxpayer's tax for such year or years. For purposes of chapter 44-30, if the credit allowed under this section for any taxable year exceeds the taxpayer's tax for such year, the amount of credit not credited in such taxable year may be carried over to the following year or years, up to a maximum of seven (7) years, and may be credited against the taxpayer's tax for such year or years.

(f)(1) With respect to property which is depreciable pursuant to 26 U.S.C. section 167 and which is disposed of or ceases to be in qualified use prior to the end of the taxable year in which the credit is to be taken, the amount of the credit shall be that portion of the credit provided for in this section which represents the ratio which the months of qualified use bear to the months of useful life. If property on which credit has been taken is disposed of or ceases to be in qualified use prior to the end of its useful life, the difference between the credit taken and the credit allowed for actual use must be added back in the year of disposition. Provided, however, if such property is disposed of or ceases to be in qualified use after it has been in qualified use for more than twelve (12) consecutive years, it shall not be necessary to add back the credit as provided in this subdivision. The amount of credit allowed for actual use shall be determined by multiplying the original credit by the ratio which the months of qualified use bear to the months of useful life. For purposes of this subdivision, useful life of property shall be the same as the taxpayer uses for depreciation purposes when computing his federal income tax liability.

(2) Except with respect to that property to which subdivision (3) of this subsection applies, with respect to three (3) year property, as defined in 26 U.S.C. section 168(c)(2), which is disposed of or ceases to be in qualified use prior to the end of the taxable year in which the credit is to be taken, the amount of the credit shall be that portion of the credit provided for in this section which represents the ratio which the months of qualified use bear to thirty-six (36). If property on which credit has been taken is disposed of or ceases to be in qualified use prior to the end of thirty-six (36) months, the difference between the credit taken and the credit allowed for actual use must be added back in the year of disposition. The amount of credit allowed for actual use shall be determined by multiplying the original credit by the ratio which the months of qualified use bear to thirty-six (36).

(3) With respect to any recovery property to which 26 U.S.C. section 168 applies, which is a building or a structural component of a building and which is disposed of or ceases to be in qualified use prior to the end of the taxable year in which the credit is to be taken, the amount of the credit shall be that portion of the credit provided for in this section which represents the ratio which the months of qualified use bear to the total number of months over which the taxpayer chooses to deduct the property under 26 U.S.C. section 168. If property on which credit has been taken is disposed of or ceases to be in qualified use prior to the end of the period over which the taxpayer chooses to deduct the property under 26 U.S.C. section 168, the difference between the credit taken and the credit allowed for actual use must be added back in the year of disposition. Provided, however, if such property is disposed of or ceases to be in qualified use after it has been in qualified use for more than twelve (12) consecutive years, it shall not be necessary to add back the credit as provided in this subdivision. The amount of credit allowed for actual use shall be determined by multiplying the original credit by the ratio which the months of qualified use bear to the total number of months over which the taxpayer chooses to deduct the property under 26 U.S.C. section 168.

(g) No deduction for research and development facilities under section 44-32-1 shall be allowed for research and development property for which the credit is allowed under this section.

(h) No investment tax credit under section 44-31-1 shall be allowed for research and development property for which the credit is allowed under this section.

(i) The investment tax credit allowed by section 44-31-1 shall be taken into account before the credit allowed under this section.

(j) The credit allowed under this section shall only be allowed against the tax of that corporation included in a consolidated return that qualifies for the credit and not against the tax of other corporations that may join in the filing of a consolidated return.

(k) In the event that the taxpayer is a partnership, joint venture or small business corporation, the credit shall be divided in the same manner as income.

44-32-3. Credit for qualified research expenses. -- (a) A taxpayer shall be allowed a credit against the tax imposed by chapters 11 or 30 of this title. The amount of the credit shall be five percent (5%) {ADD (and in the case of amounts paid or accrued after January 1, 1998, twenty-two and one-half percent (22.5%) for the first twenty-five thousand dollars ($25,000) worth of credit and sixteen and nine-tenths percent (16.9%) for the amount of credit above twenty-five thousand dollars ($25,000) ADD} of the excess, if any, of:

(1) The qualified research expenses for the taxable year, over

(2) The base period research expenses.

(b) The terms "qualified research expenses" and "base period research expenses" shall have the same meaning as defined in 26 U.S.C. section 41, provided, however, that such expenses shall have been incurred in this state after July 1, 1994.

(c) The credit allowed under this section for any taxable year shall not reduce the tax due for such year {ADD by more than fifty percent (50%) of the tax liability that would otherwise be payable, and further ADD} , in the case of corporations, to less than the minimum fixed by section 44-11-2 (e). However, if the amount of credit allowable under this section for any taxable year {DEL reduces the tax to the minimum fixed by section 44-11-2 (e) DEL} {ADD is less than the amount of credit available to the taxpayer ADD} , any amount of credit not credited in such taxable year may be carried over to the following year or years, up to a maximum of seven (7) years, and may be credited against the taxpayer's tax for such year or years. For purposes of chapter 30 of this title, if the credit allowed under this section for any taxable year exceeds the taxpayer's tax for such year, the amount of credit not credited in such taxable year may be carried over to the following year or years, up to a maximum of seven (7) years, and may be credited against the taxpayer's tax for such year or years. For purposes of determining the order in which carry-overs shall be taken into consideration, the credit allowed by section 44-32-2 shall be taken into account before the credit allowed under this section.

(d) The investment tax credit allowed by section 44-31-1 shall be taken into account before the credit allowed under this section.

(e) The credit allowed under this section shall only be allowed against the tax of that corporation included in a consolidated return that qualifies for the credit and not against the tax of other corporations that may join in the filing of a consolidated return.

(f) In the event the taxpayer is a partnership, joint venture or small business corporation, the credit shall be divided in the same manner as income.

SECTION 2. This act shall take effect January 1, 1998.