Published
June 28, 2023
Fill me in: For nearly 70 years, businesses have been able to immediately deduct 100% of their research and development (R&D) expenses, which can include costs associated with the development, testing, and improvement of products and services.
However, as of January 2022, businesses are no longer able to immediately write off these expenses. Instead, they are required to amortize their R&D investments, severely limiting their ability to continue investing in their business and threatening the competitiveness of the United States on a global scale.
Congress should restore immediate R&D expensing to send a signal to the business community that our country values and supports domestic innovation.
Why it matters: Immediate R&D expensing incentivizes critical investments in innovation and technological breakthroughs by providing businesses the ability to fully deduct their R&D expenditures, including wages, in the tax year that they’re incurred.
But the expiration of this provision has required businesses to begin amortizing their R&D investments over a period of five to 15 years, starting with their 2022 tax returns. This change has also made the United States a global outlier at the expense of our economic competitiveness, as only two other developed countries have adopted such counterproductive policies.
By the numbers: Small businesses rely on new technologies to keep operations running smoothly and their business growing, but these new technologies are often costly for small enterprises. Recent data from SBE Council shows that failure to renew immediate R&D expensing will result in an additional tax hit of 32%, or an average of $59,000. Other key findings include:
- 29% of small businesses have used immediate research and development expensing (R&D tax credit), and the highest usage is among tech companies (45%).
- 28% of small businesses are surprised that the R&D tax credit is no longer available, 35% of those small businesses that would otherwise utilize the R&D tax credit will have to borrow to pay their taxes, and 19% speculate their firm may go out of business.
- 86% of small businesses support the bipartisan approach to reinstate the R&D tax credit and to make it permanent.
What small businesses are saying: Small businesses are sounding the alarm on the negative consequences of no longer being allowed to immediately deduct their R&D expenses.
Natalie Kaddas runs a second-generation family-owned thermoplastic manufacturing business that has operated in Utah for 50 years. Kaddas says the ability to write off R&D expenses promotes new investment in her business and workforce.
“We have long relied on familiar, pro-growth provisions in the tax code that promote business investment in research and experimentation to develop new products and technologies,” said Kaddas, CEO of Kaddas Enterprises and Chair of the U.S. Chamber’s Small Business Council.
“The harsh impact of this tax law change cannot be overstated for small businesses like mine,” said Kaddas. “Approximately 18% of our total wages support R&D investments, and our inability to fully deduct these wages on this year’s tax return has increased our tax burden by 35%. This increased tax bill limits our ability to make future capital purchases, grow our workforce, and invest in additional innovation.”
Bottom line: There are bipartisan options on the table – including the American Innovation and Jobs Act and American Innovation and R&D Competitiveness Act – to restore the ability of businesses to immediately deduct their R&D expenses, and the Chamber strongly supports these bills. Failure to act now to restore immediate R&D expensing will increase the cost of innovation in the United States and slow economic growth for businesses of all sizes.
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About the authors
Watson M. McLeish
Watson McLeish is senior vice president for Tax Policy at the U.S. Chamber of Commerce, where he serves as the primary adviser on all tax policy-related matters.
Thomas M. Sullivan
Thomas M. Sullivan is vice president of small business policy at the U.S. Chamber of Commerce. Working with chambers of commerce and the U.S. Chamber’s nationwide network, Sullivan harnesses the views of small businesses and translates that grassroots power into federal policies that bolster free enterprise and reward entrepreneurship. He runs the U.S.
