Biden tax plan sets aside money for R&D incentives, but details lacking

By Doug Connolly, MNE Tax

The Biden Administration proposes to enhance incentives for research and development (R&D) using revenue repurposed from the proposed repeal of the deduction for foreign-derived intangible income (FDII), according to the President’s tax plan outlined in the Green Book released May 28.

The budget shows a dollar-for-dollar trade off, with all money from the repeal of FDII going directly to additional support for R&D expenditures. In 2022 – following a proposed FDII repeal effective at the end of 2021 – this is estimated to amount to more than USD 8 billion in additional support for R&D.

However, the Green Book includes no details on proposed changes to R&D provisions. 

The day before the budget’s release, the President said in a speech in Ohio on the economy, “Consider this: Three decades ago, the United States was number one … in the world for R&D spending … as a share of our economy.  You know where we are now in the international competition?  We’re number nine.  Nine.” 

The President was drawing a contrast in his speech with respect to China’s increasing R&D investment in particular, but US support for R&D as a percentage of GDP has also stalled in recent years compared to OECD countries, especially France and the UK. 

The Administration’s intent to reverse this trend is clear. What is not clear is how specifically the Administration would seek to expand R&D incentives to reach that end. 

The Administration’s intent to reverse this trend is clear. What is not clear is how specifically the Administration would seek to expand R&D incentives to reach that end. 

It seems likely that one change, given its bipartisan support, would be eliminating the new requirement to amortize R&D expenses over five years that takes effect starting in 2022. 

The change was included in the 2017 Tax Cuts and Jobs Act as a revenue raiser. Bipartisan bills have been introduced to undo the change before it takes effect. 

Historically, businesses have been able to fully deduct R&D expenses in the year incurred. The change, if not repealed, will increase the upfront costs for business R&D investment, which would seem to run counter to the Administration’s goals.