Right before the midterms, in the thick of political news and constant TV campaign ads, CFOs had their own demands for Washington: Change the tax structure of a very specific—but major for many—research and development tax.
Here’s the backstory: In 2017, the passage of the Tax Cuts and Jobs Act (TCJA) changed a few tax specifics for American businesses. The particular tax that has gotten some executives heated is the one that takes away their ability to take their research and development expenditures as a deduction in the year of usage. Since the beginning of 2022, businesses instead have to amortize that budget over a five-year period.
Think of it like this: Imagine if your parents kindly tell you that if you get all As during your first semester of college, they will reimburse you for your food costs, only to then find out that while they will reimburse you, the money will be spread out over the years you are in university, not paid all at once.
The letter was sent by the National Manufacturers Association, which is chaired by tech company Intel, in an effort to get CFOs together to sign a letter to Congress. Intel has committed to shifting semiconductor production domestically after battling supply chain chaos over the past three years. The commitment from Intel is estimated to cost upwards of $100 billion to build out a chip building “mega-site” in Ohio. As International Tax Review pointed out, the passage of the CHIPS and Science Act this year, which was intended to boost domestic production of semiconductors and includes an R&D tax credit, may have created even more confusion about R&D tax policies, and the provision that prompted the CFOs to write to Congress “might undermine the incoming R&D credit in offsetting research costs.”
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Before anyone grabs their tissues for corporate America, however, this change was part of a larger effort to redesign taxes for the largest companies in the US. In the same Tax Cuts and Jobs Act, the corporate income tax rate was slashed from 35% to 21%
The R&D tax has been unpopular with executives who claim it could stifle innovation (that old chestnut) and potentially cause them to lag behind foreign competitors. The letter to Congress, signed by 178 CFOs, reads: “From 1954 through the beginning of this year, qualified R&D expenses were fully deductible in the year incurred. Unfortunately, on January 1, 2022, a harmful tax change went into effect that makes R&D more expensive to perform in the US.”
The November 4 letter from the CFOs to Congress seems to have been a last-ditch effort in the 2022 fiscal year to get Congress to change the tax code as voted on by the Senate in May of this year, with strong bipartisan support.
In a recent conversation, KPMG’s John Gimigliano, principal-in-charge, Federal Tax Legislative and Regulatory Services, told CFO Brew that this issue is No. 1 for both sides of Congress right now. The sticking point? Democrats also want to add an extension of the enhanced child tax credit, the Wall Street Journal reported.
While the midterms may be behind us, we’ll see what’s to come of the R&D tax, and what concessions might be made to fulfill CFOs’ requests.—KT