By Mark Dunning
Without repeal, research and development in the U.S. will become more expensive beginning in 2022.
Starting in 2022, the tax code will make it more expensive for companies to undertake research and development in the U.S. by dragging out deductions beyond the year research expenses are incurred. The tax code change stems from a revenue producing provision in the Tax Cuts and Jobs Act requiring businesses to gradually write off R&D expenses over five years with other qualifying R&D expenses amortized over 15 years.
The ability to deduct R&D expenses in the same year they are incurred has been permitted since 1954. By disallowing current year expensing, companies will need to increase their level of investment to support U.S. innovation at the same level. The higher cost is widely expected to negatively impact U.S. innovation and jobs. In its first five years, this provision is forecasted to lead to the loss of 23,400 R&D jobs, a job loss number predicted to more than double over the following five years (Impact of the Amortization of Certain R&D Expenditures on R&D Spending in the U.S.)
Recognizing the tax code change as an impediment to R&D innovation, a bipartisan bill, the American Innovation and Competitiveness Act (H.R. 4549), has been introduced in Congress to restore the deduction by eliminating the amortization provision before it becomes effective. The R&D Coalition, a partnership of American companies and business associations, strongly supports the bill. In a press release, Intel’s Chief Tax Officer and Corporate Vice President Sharon Heck, said, “Our tax code has long recognized this and created a favorable environment for R&D investment in the U.S. by allowing U.S. companies to immediately deduct their R&D expenses.”
The Takeaway
The TCJA provision represents a big setback in R&D spend incentives for companies in the U.S. If repeal doesn’t happen, all Section 174 expenses beginning in 2022 will need to be capitalized and amortized. This constitutes not only a tax increase but would require each company to complete a Section 174 study to determine qualified expenses. For engineering firms, contract design companies, and a litany of other companies, they would be required to capitalize most of their company’s annual expenses.
We’ll keep you updated on the bill’s progress.
Got questions? Get in touch with Mark Dunning, partner at TaxOps Minimization, at mdunning@taxops.com.
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