US R&D tax incentives will be among least generous unless Congress acts, study finds

By Doug Connolly, MNE Tax

The US will drop to a rank of 32nd among a peer group of 34 large economies in terms of its tax support for research and development (R&D) if it allows the new requirement to amortize R&D expense to take effect as scheduled in 2022, according to a September 7 study from the Information Technology & Innovation Foundation.

The study states that the US was the first country to introduce an R&D tax credit in 1981 but has since slid to 24th place among a peer group of 34 nations, consisting of 30 OECD members plus 4 BRICS countries (Brazil, Russia, India, and China).

The US would fall further in the rankings if the provision enacted in the 2017 Tax Cuts and Jobs Act to require amortizing R&D expenses over five years starting in 2022 takes effect. Up until now, US companies have been able to deduct such expenses when incurred, as companies are able to do in most countries.

Allowing the expensing change to take effect, the study finds, would reduce the overall US R&D subsidy by about five percentage points – even more if US states follow the federal government’s lead.

There is political impetus to address this provision. US Senators showed bipartisan support for undoing the change in August in a non-binding budget resolution amendment. Subsequently, in the House, a proposal was put forward to delay the change for four years to allow additional time to work on a more permanent solution. Treasury Secretary Janet Yellen has also indicated an openness from the Biden Administration to undo the change.

Despite the support to undo the provision before it takes effect, doing so comes at a cost to federal revenues. With contentious debates already underway on what’s in and what’s out in the budget reconciliation bill, companies with US-based R&D plans can only wait and see what priority this change takes amongst lawmakers in Washington.