Economic Development Act of 1988

Economic Development Act of 1988 - Title I: Provisions Relating to Capital Gains - Amends the Internal Revenue Code to provide for the nonrecognition of gain, upon taxpayer election, in certain cases involving the sale or exchange of any of the following, which must have been held continuously by the taxpayer during the five years preceding the sale or exchange: (1) an interest as a proprietor in a proprietorship, or as a partner in a closely held partnership (the taxpayer holds at least 80 percent of the capital interest); (2) stock in a closely held corporation (the taxpayer holds at least 80 percent of the value of the stock); or (3) property used by a proprietor in the business of the proprietorship. Permits such nonrecognition of gain only when, within 18 months of the given sale or exchange, the taxpayer either purchases like interest, stock, or property or makes a nondeductible contribution to an individual retirement plan.

Increases from one year to two years the holding period required for long-term capital gain treatment of property acquired after January 1, 1988.

Allows a noncorporate taxpayer a capital gains income tax deduction equal to: (1) 50 percent for assets held five years or longer; and (2) 25 percent for assets held for between two and five years.

Decreases the capital gains tax rate for corporations from 34 percent to: (1) 20 percent for assets held five years or longer; and (2) 27 percent for assets held for between two and five years.

Title II: Treatment of Educational Assistance Benefits - Restores the exclusion from the gross income of an employee of up to $5,250 of educational assistance provided under an employer's educational assistance program. (Under current law the exclusion expired as of January 1, 1988.) Requires annual indexing of the maximum permissible exclusion. Applies no maximum with respect to graduate students who are teaching or doing research for certain educational organizations.

Title III: Educational Development - Exempts from the ten percent additional tax on early distributions from qualified retirement plans any distributions made to an employee after separation from service to the extent the amounts are used to alleviate the employee's financial hardship resulting from educational and retraining expenses paid for the purpose of enhancing future employment.

Title IV: Research and Development - Increases from 50 percent to 67 percent the amount of research and development expenditures that a company must allocate to income from sources within the United States. Establishes a special rule for the qualified research and experimental expenditures required by governmental entities.

Requires companies to report on a consolidated basis with respect to the expenditures associated with this source rule.

Makes permanent the income tax credit for qualified research expenditures by repealing the provisions of the Internal Revenue Code that would terminate the credit for expenses incurred or paid after 1988.