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The United States should offer young innovative firms refundable R&D tax credits in lieu of using carry-forward or carry-backward provisions on business losses.

Investing in R&D is risky, but creates a large societal benefit through knowledge spillovers. Furthermore, R&D creates new products and practices that create economic growth. Many of the benefits of R&D are not captured by the firm producing the research. This is why the United States, like most other countries, offer incentives to firms investing in R&D. Unfortunately, the incentives only impact firms that are profitable. Many of the most innovative young firms engaged in R&D, which the credit should be particularly interested in supporting, will not become profitable until after a high-risk period of R&D investment needed to develop an idea into a marketable product. Offering a refundable R&D tax credits in lieu of using carry-forward or carry-backward provisions on business losses will allow the R&D tax credit to extend to young firms. Australia, Canada, France, Norway, and the United Kingdom have already adopted this method of incentivizing R&D in young innovative firms. Additionally, within the EU, governments can give extra incentives to firms less than six years old that invest more than 15 percent of their total revenues on R&D across all regions and sectors without breaking EU state aid rules.