When writing the 2017 Tax Cuts and Jobs Act (TCJA), the Republican Party wished to decrease the estimated financial impact of the bill, as it would increase the national debt by trillions of dollars, and the party was traditionally seen as a party that would be deficit hawks and fiscally responsible. To this extent, they included a bevy of small provisions in the Tax Cuts and Jobs Act that would somewhat increase revenue to offset the large tax cuts for mostly wealthy corporations and individuals. One of these small changes required R&D tax credits to be amortized over 5 years instead of immediately deducted. The rationale behind this was simple: while de jure the amount of the tax deduction (hereinafter referred to as the tax credit) was not changed, in effect inflation took a bite out of the value of future payments, effectively resulting in a 15-20% decrease in the R&D tax credit. This would, of course, save the government that amount of money in increased tax revenues. The idea would eventually come back and revert to the old immediate amortization requirement, when less attention was being paid on how big the TCJA was. However, it immediately resulted in a decrease in investment into capital goods and R&D at research-intensive firms. The cut was so large that it resulted in an 11% drop in innovation at research-intensive firms, according to the Stanford Report. And even that was with the expectation that they should keep spending level because the provision would be repealed.
Unlike expectations, however, the provision has continued to this day. This is because of Democrats hoping to use the provision as leverage to force through partisan riders around issues like the Child Tax Credit. This has led to even further declines in U.S. innovation spending as innovative firms have lost hope in repeal and capital has shifted away from these less-profitable firms. Many of my sources for this article have spoken to an apparent hypocrisy on this issue: even as the U.S. tried to encourage innovation with the CHIPS Act or the IRA, it failed to address one of the main barriers to R&D profitability. Many groups, such as the National Association of Manufacturers or The American Council of Engineering Companies, have warned of the dangers of the provision for their profitability. They also cited it as particularly unusual at a time where highly mobile innovation spending could move overseas to American competitors like China, where there are more generous tax benefits for R&D even before you factor in the de facto cut as a result of inflation from the amortization requirement.
Instead of further hampering innovation, the United States Congress should repeal amortization requirements for R&D tax credits by passing the American Innovation and R&D Competitiveness Act of 2023. Unlike most other issues that affect American life, there is no iron triangle in this particular scenario. The IRS, which implements the tax code, has no discretion over the codified requirement to amortize R&D tax credits. Congress, due to the attachment of riders, has also proven relatively resilient to lobbying. A mere cut to innovation tax credits, however, is not the only major objection with the amortization requirement. A side effect of the de facto reduction is that increases costs for small but fast-growthing businesses. By requiring amortization for five years even though the company may have only been created that year, Congress’s choices have delayed funding for these companies. This requires them to take on debt, which comes with service costs and a loss of profitability. It also may unnecessarily delay R&D spending in startups or slow down the rate at which they are able to innovate, commercialize and ultimately bridge the “valley of death” into a successful American company. Startups are not only the foundation of the American dream, they are also a key driver of American advantages in innovation and economic growth. Startups, uninvested in the current market, are also more likely to create genuine disruptive innovations that disrupt traditional market players rather than slow and incremental progress. In addition, the politicking and political uncertainty of the provision has resulted in increased risks, liability and costs for innovative companies, according to the Wall Street Journal. This doesn’t just include Silicon Valley: it also includes small family shops that may be investing in a new device to help them innovate and break out of their niche, or a medium-size software company expanding its offerings or developing more advanced features for their existing products, according to the Tax Foundation. By decreasing the profitability of these companies, there will be less entry, less capital, and less innovation, according to the American Enterprise Institute.
I started choosing my elected officials from Federal congressmen that represent Illinois, as only the United States Congress has the authority to amend the U.S. tax code. I narrowed it down to a Senator, as I wanted someone with more influence to cut a deal with Republicans and who would most likely stick around longer. So, it was between Tammy Duckworth and Dick Durbin. I chose Tammy Duckworth for two reasons: she is the junior senator for Illinois, so may be less secure in her position and more open to constituent letters. Secondly, she is on the Senate Committee on Small Business and Entrepreneurship and the Senate Foreign Relations Committee, which would both have relevant interests in the effects of the amortization requirement on small businesses and offshoring of R&D to countries such as China, respectively. She also currently has no cited opinion on the repeal of the amortization of R&D tax credits, so she may not have an opinion.
Works Cited
“Issue Brief: R&D Amortization.” The American Council of Engineering Companies, 18 Apr. 2023, www.acec.org/resource/issue-brief-rd-amortization/. Accessed 7 Dec. 2024.
Muresianu, Alex. “R&D Amortization Hurts Economic Growth, Growth Industries, and Small Businesses.” Tax Foundation, 1 June 2023, taxfoundation.org/blog/rd-amortization-impact/. Accessed 8 Dec. 2024.
Pomerleau, Kyle. “R&D and the TCJA: The Basics.” AEIdeas, American Enterprise Institute, 9 Jan. 2024, www.aei.org/economics/rd-and-the-tcja-the-basics/. Accessed 9 Dec. 2024.
Rubin, Richard. “Small Businesses Face Big Tax Bills From Research-Deduction Change.” Wall Street Journal, 17 Mar. 2023, www.wsj.com/articles/small-businesses-face-big-tax-bills-from-research-deduction-change-a189b113. Accessed 10 Dec. 2024.
“The tax code oversight causing innovation to falter.” Stanford Report, Stanford University, 2 Oct. 2024, news.stanford.edu/stories/2024/10/american-innovation-got-slammed-temporary-end-key-tax-incentive. Accessed 10 Dec. 2024.
United States, Congress, House. Internal Revenue Code of 1986. United States Code, title 26, section 174. Congress.gov, Congress, 22 Dec. 2019, www.congress.gov/bill/115th-congress/house-bill/1/text. Accessed 8 Dec. 2024.
—, —, House. American Innovation and R&D Competitiveness Act of 2023. Congress.Gov, Congress, www.congress.gov/bill/118th-congress/house-bill/2673. 118th Congress, House Resolution 2673.
