For nearly seven decades, American businesses enjoyed favorable tax treatment for research and development (R&D) expenses, allowing them to deduct 100 percent of these costs in the year they were incurred. This incentivized investments in innovation and technological advancement, leading to countless scientific breakthroughs and economic growth. However, the 2017 Tax Cuts and Jobs Act (TCJA) changed the tax treatment of R&D, requiring businesses to amortize these investments over five to 15 years, significantly increasing their annual tax liability and discouraging innovation-generating investments.
In response to these concerns, the House of Representatives passed the Tax Relief for American Families and Workers Act in January, which would restore first-year expensing of R&D investments. This legislation has bipartisan support and is expected to be considered by the Senate in the coming months.
The change to Section 174 of the Internal Revenue Code under the TCJA has had a particularly detrimental impact on American startups, which tend to invest heavily in R&D. The sudden inability to write-off these investments can be devastating for these fragile new companies, leading to layoffs, scaled-back business plans, and even business failures. Studies have shown that startups are disproportionately responsible for the innovations that drive economic growth and account for virtually all net new job creation.
The change to Section 174 is also damaging to America’s innovation leadership in the face of heightened global competition, particularly from China. China has made significant investments in R&D, with a goal of becoming the 21st century’s unrivaled economic superpower. In its 14th Five-Year Plan, China accelerated the development of seven strategic technologies, including artificial intelligence, quantum computing, and biotechnology. President Xi Jinping has emphasized the importance of self-reliance and strength in science and technology, and China is providing significant tax incentives and other support to encourage R&D.
To meet this competitive threat, America must restore first-year expensing of R&D investments. This is not simply a matter of tax rates, but a strategic imperative for our nation’s long-term economic competitiveness. With this in mind, we respectfully urge the Senate to pass the Tax Relief for American Families and Workers Act as soon as possible.
