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Industry Spotlight

Amortization Angst: How Tax Policy Gridlock Could Stifle U.S. Innovation

DST Advisory Group - How Tax Policy Gridlock Could Stifle U.S. Innovation

How Tax Policy Gridlock Could Stifle U.S. Innovation

As Congress grapples with the Tax Relief for American Families and Workers Act, businesses across the United States are keenly watching the developments, particularly those concerning the treatment of research and development (R&D) expenses. The legislation, which has successfully passed through the House but is currently stalled in the Senate, could significantly impact how businesses account for their R&D expenditures.

A Look at the Current Scenario

Under the 2017 Tax Cuts and Jobs Act (TCJA), businesses were required to capitalize and amortize R&D expenses over five years domestically and over 15 years for foreign expenditures. This shift from the previous ability to immediately expense these costs was met with significant opposition, especially from small and medium-sized companies in the tech sector, who argue that it stifles innovation by tying up funds that could be used for further research and development.

The change, which took effect in 2022, caught many companies off guard. The impact is particularly severe on smaller firms, which are finding it challenging to manage the increased tax liabilities, leading some to take drastic measures such as layoffs and project suspensions.

Legislative Hopes and Delays

The House responded to these concerns by passing the Tax Relief for American Families and Workers Act early this year. The act proposes to postpone the mandatory capitalization and amortization requirement through December 31, 2025, providing a temporary reprieve for businesses. This would allow companies to once again deduct their domestic R&D costs immediately for tax years beginning after December 31, 2021, and before January 1, 2026.

However, the bill’s progress has been frustratingly slow in the Senate, where it faces opposition from some Republicans concerned about the expansion of the child tax credit and the potential political implications ahead of the November elections. Senator Mike Crapo (R-Idaho) noted that negotiations remain “at a standstill,” highlighting the political friction hindering the bill’s progress. We are in tax policy gridlock.

Industry Reaction and the Road Ahead

The R&D community has been vocal in its support for the full repeal of the TCJA’s amortization provisions. As the situation stands, the industry faces what some have termed an “R&D recession,” with spending in decline for consecutive quarters.

Opinion: A Call for Clarity and Action

The ongoing uncertainty surrounding the amortization of R&D expenses underscores the need for more permanent solutions to support innovation. While the temporary measures proposed in the Tax Relief for American Families and Workers Act are a step in the right direction, businesses require stability in their financial planning to thrive and innovate. Congress must prioritize resolving these issues, not only to alleviate the immediate financial pressures on businesses but also to sustain the long-term health of the nation’s innovation ecosystem.

The Senate’s delay not only hampers business growth but also puts at risk the United States’ position as a global leader in technology and innovation. It is imperative for policymakers to act swiftly and decisively to remove the barriers that currently hinder the R&D efforts essential for economic advancement.

As the debate continues, all eyes remain on the Senate. Senator Ron Wyden (D-Ore.), a chief architect of the bill, is actively appealing to his colleagues, stating, “This cannot wait,” signaling a push to move forward with a vote regardless of ongoing negotiations. The upcoming weeks are critical, and there may be significant movement either to push the bill through as is or possibly open it for further amendments to garner broader support.

The outcome of this legislative standoff will have far-reaching implications for businesses and the overall economy. It is high time for a resolution that supports our innovators and, by extension, the future economic prosperity of our nation.