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Fix research and development accounting problems so that innovation can happen – Daily Montanan [1]

['More From Author', 'June', 'Lori Caplis']

Date: 2023-06-03  

American innovation has improved our lives, and the research and development that has been undertaken by private businesses of all sizes is a key part of this innovation boon. The advancements in manufacturing, technology, agriculture, medicine, and many other business sectors have immense positive effects on our society – simultaneously their investments have made our economy stronger. Their investments have led to high-quality, good paying jobs in emerging sectors for thousands of Montanans and millions of Americans alike.

However, a key change to the tax code runs counter to a pro-growth, pro-innovation strategy. Prior to 2022, businesses engaged in R & D activities were given two options to deduct incurred expenses from their tax bill: option a) deduct 100% of the expenses incurred in a given year (a process known as full expensing); or option (b) deduct the expenses incurred in a given year during a five-year period (also known as “amortization”).

Due to provisions of the 2017 Tax Cuts and Jobs Act going into effect in 2022 businesses no longer have two options they are solely stuck with amortization. Businesses are now required to deduct their research-and-development expenses during the course of five years for expenses incurred inside the U.S. for a given tax year. Complicating things further, if the U.S. business incurred their expenses outside of the U.S. these international expenses must be spread over 15 years.

This change has already done irreparable harm to the economy, jobs, and businesses – particularly small to medium sized mom-and-pop shops. This is why dozens of Democratic and Republican members of the House and Senate are coming together to co-sponsor legislation to correct this error.

With the first tax season following implementation having just ended, businesses are seeing the negative results of amortization. Across Montana and the country, there are countless examples of small- and medium-size businesses who have been saddled with unanticipated tax bills in the six and seven figure range. Tax bills that are certain to slow business growth, force small businesses to acquire new debt to stay afloat, or in a worst-case scenario it will force many businesses to close their doors forever.

During the next several years, small businesses won’t be the only sector to suffer because of these new tax rules. Research and development is a lifeline for a struggling economy. Private sector and government-run research and development contribute almost four percent to the U.S. gross domestic product. Of the four percent, private sector R &D is the dominant force, making up 75 percent of total research-and-development spending with more than $500 in annual expenses. Amortization, and the resulting reduction in research-and-development spending will reduce the GDP by $45 billion.

With that incredible economic loss, there is a heightened risk that hundreds of thousands of the 30 million U.S. research-and-development rated jobs will be on the chopping block. This includes thousands of Montana jobs.

Alternatively, a return to full expensing, will continue the innovation gains research and development gives society and could create 1.2 million jobs and millions in employee earnings during the next 10 years.

It a fact, our private sector businesses need the tools at their disposal to succeed. In a divided Congress, there are few policies that have broad agreement across both parties – this is one of the few. Across parties, across industries, from mom-and-pop small businesses to large manufacturing companies, all agree amortization is an innovation killer.

The restoration of full expensing is what promises the best path forward to guarantee businesses can engage in research and development and innovate without the ensuing costs and tax bills crippling their businesses, harming workers, and shrinking the economy. Action needs to be taken – the stakes are too high.

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[1] Url: https://dailymontanan.com/2023/06/03/fix-research-and-development-accounting-problems-so-that-innovation-can-happen/

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