Small business owners have been suffering in recent years with various federal tax laws impeding their ability to operate and grow. They have been actively expressing their hardships to their Congressional leaders, but whether those leaders are willing to spread some holiday cheer is still an open question. Congressional leaders went home this week for winter recess so there is no way for a tax extender bill to be passed in 2023, but there remains a glimmer of hope for action in early 2024. Given the state of the Main Street economy, let us hope so.
If you are like me and have been following the much-needed changes in relation to Section 174 R&E capitalization, its progress has been a roller coaster ride. Legislation to address the problem moved through the Ways and Means Committee last Spring, but then it languished on the House calendar. There were hopes Congress would moving forward this fall, but then Speaker McCarthy was removed in early October and it took several wasted weeks before Speaker Johnson was selected as his replacement.
Then we were told bicameral talks were progressing around Thanksgiving, but the good news died after the holiday. More recently, tax writers were meeting on a regular basis and the news reported on a rough outline of a plan, but that came to nothing. So now Congressional leaders have departed for winter recess and will return to a full plate of financing the government when they return.
While all this start and stop is understandable in a deeply divided Congress, business owners remain stuck with dysfunctional tax law that is forcing them to make high, unexpected tax payments on their research and experimental (“R&E”) expenditures while paying 20-year high-interest rates to finance their increasing tax bills.
Accountants are left scratching their heads in the realization that many of their clients are faced with devastating options, including severe cutbacks on their R&E expenditures, relocating research activities out of the United States, or even closing their business altogether. This reality has turned tax accountants into therapists for their clients this past year, with clients going through tax version of the five stages of grief combined with a profound misunderstanding of why Congress has abandoned them and their American Dream. As one of my peers said, “I did not sign up for this. I have practiced for more than 20 years, and the conversations surrounding IRC 174 R&E required capitalization have been the worst experiences of my career.”
So where is the calvary? Congressional leaders fighting for their business appear to be in the in the minority these days. I have been on countless phone calls with lobbyist groups, congressional leaders, and their advisors to be repeatedly told that there is bi-partisan support and understanding that forcing R&E capitalization is determinantal to businesses and the economy.
While most Americans agree that we need to address the growing budget deficit, they also agree that some key policies need to remain in place, such as essential support for families and military defense needs. Ensuring the U.S. continues to be a global research leader needs to be one of those non-negotiable items. If we want the U.S. to remain a leader in the sciences, environmental technology, aerospace, and so much more, research needs to be increased.
The tax code’s ability to drive and support certain behaviors is a well-used policy device. The recent shift to requiring that R&E expenditures be capitalized over five-years sends a clear and wrong signal to businesses that the government no longer supports the importance of research in the United States. Under the new requirement, companies that assist in federal research are now having to pay federal income tax on any federal research grants received. In other words, as my client so eloquently pointed out, the government is asking for our company to pay them a fee for helping them research.
Worse, most foreign countries are expanding and improving local country tax incentives to increase foreign research activities, resulting in a significant shift of investment overseas. The United States is becoming less dominant in science and engineering research, which could negatively affect our future economy and national security.
No matter what field of practice, the need for research is clear and is highlighted in some of the biggest industries in the United States, including health and medicine, public education, the automotive industry, and pharmaceuticals.
So what can we expect in the New Year? A tax package proposal negotiated by House Ways & Means Committee Chairman Jason Smith (R-MO) and Senate Finance Committee Chairman Ron Wyden (D-OR) that is expected to address IRC Section 174 R&D could potentially emerge this week. Lawmakers have long said they want any tax changes in place before the start of the tax filing season, which the IRS recently announced to be Monday January 29, 2024.
Plenty of items could derail negotiations, including disagreements over government funding as well as potential impeachment proceedings. But everyone agrees that the more time that passes in 2024, the less likely a federal tax extender bill will be adopted.
Some Congressional leaders may support punting federal tax issues into 2025 but waiting three years for relief will have a dramatic negative impact on these businesses, their communities, and the economy. Many businesses that are known for their innovation and research will not be able to sustain three more years of rising tax bills and the impact of the decisions these businesses will be forced to make could be devastating.
This article was originally published by Lynn Mucenski Keck in Forbes on December 23, 2023.
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