Little-known rule change is wreaking havoc on small business research and development – find out why!

For years, American innovation has improved our lives, and research and development conducted by private companies of all sizes is a key part of this innovative drive. Whether it is advances in manufacturing, technology, medicine and many other sectors, the positive effects present in our society are numerous. At the same time, innovation has strengthened our economy. It has created high-quality, well-paying jobs in new industries for millions of Americans and fueled economic growth.

The federal R&D tax credit has long been a critical revenue and cash management strategy for the nation’s most promising companies. In 2022, the Cut Inflation Act brought welcome changes for small businesses with less than $5 million in gross receipts. The provision allows qualifying companies to more than double the amount they can potentially claim as an R&D tax credit to offset payroll.

Despite this good news, the untold story is another key tax code change that runs counter to a pro-growth, pro-innovation strategy. Prior to 2022, companies with more than $5 million in gross receipts that performed R&D activities had two options for how to deduct those expenses from their tax bills: They could immediately deduct 100% of those expenses in the year in which they those that were incurred, in a process known as full expense, or they could deduct those expenses over a five-year period in what is known as amortization.

Following a change in 2022, due to the entry into force of a provision of the Tax Cuts and Jobs Act of 2017, businesses were left with amortization as your only option. Companies are now required to deduct their R&D expenses for five years for costs incurred within the US and 15 years for costs incurred internationally. This change has a material and immediate impact on the companies that have relied on this credit to increase cash flow and profits.

This change, which was never intended to go into effect and, for the past two Congresses, has had dozens of Democratic and Republican co-sponsors in the House and Senate backing legislation to fix it, has already begun and will continue to do irreparable damage. . to the economy, the labor market and companies, particularly small and medium-sized companies.

With the first post-implementation tax season just ending, companies are already seeing the negative consequences of write-down. Across the country, there are countless examples of small and medium-sized businesses that have been saddled with unforeseen tax bills in the six and seven figure range. Tax bills that will almost certainly slow business growth, force them to take on new debt, or in the worst case scenario, force businesses to close their doors.

In the coming years, companies will not be the only ones to suffer. R&D is a lifeline for the economy. Both private sector and government-run R&D contribute almost 4% of gross domestic product (GDP). Of that, private sector R&D is the dominant force, accounting for 75% of total R&D spending with more than $500 billion in annual spending. The write-off and consequent reduction in R&D spending will reduce GDP by $45 billion.

With that loss, there is a greater risk that hundreds of thousands of the 30 million jobs supported by US R&D around the world will be left on the chopping block. This includes many jobs in emerging sectors of the Virginia economy, such as financial technology, medical technology, and educational technology, as well as jobs in the software, biotechnology, and manufacturing sectors.

Alternatively, a return to full spending and the dynamic R&D and innovation gains that flow from it could create 1.2 million jobs and millions in employee revenue over the next 10 years.

The fact is that our private sector companies need the tools at their disposal to succeed. In a divided Congress, there are few policies that have broad agreement between both parties, and this is one of them. Across all parties, across all industries, from small family businesses to large manufacturing firms, everyone agrees that payback is an innovation killer.

Restoring full spending is what promises to be the best way forward to ensure companies can engage in R&D and innovate without the resulting costs and tax bills crippling their operations, hurting workers, and shrinking our economy. There has to be action without delay. The costs are simply too high.