The federal research and development better known as, the R & D tax credit offered within the United States is not competitive when compared to many of the other industrialized countries’ R & D tax incentives.
To illustrate, the net (i.e., dollar-for-dollar) US R & D tax credit is typically about 5% to 7% of a company’s R & D spend in the US per year. Contrast that with the R & D tax credit available in Canada, Mexico, Ireland, France, Italy, and Japan which range from 30% to 50% of the R & D spend in those respective countries.
Also, China, India, the UK, and Brazil offer a bonus “super deduction” that ranges from 100% to 225% of the R&D spend in those countries each year. Further, some countries, like Canada, offer a refundable R&D tax credit in certain situations, whereas the US does not.
Technology Changing The Game For R&D Tax Credit Globally
As technology advances and the globe continues to get smaller, US-based companies have more options with regards to where they conduct their R & D activities. All of the industrialized countries compete for businesses to relocate their manufacturing and R & D there, in large part, by providing generous tax rates, exemptions and incentives. Several US-based companies have moved some, or all, of their R & D operations overseas over the past few decades as a result. For example, Google, Pfizer, Boston Scientific, Facebook, Twitter and Johnson, and Johnson are just some of the US-based companies that have significant operations in Ireland due to its generous tax rates and incentives, including its R&D tax credit.
R&D Tax Credits Incentivizes Long-Term Economic Growth
Technological innovation and manufacturing are what grew our country to what it is today. R & D is the main catalyst for innovation and innovation is what drives long-term economic growth. Our R & D tax credit is meant to incentivize these activities and investments at home and, thereby, promote job creation and prosperity in the US. Congress should be looking to increase our R & D tax credit to make it more competitive globally.
For example, it should increase the Alternative Simplified Credit (ASC) from 14% to 20%, the same as the regular R & D tax credit. This increase was proposed in the Research and Experimentation Advances Competitiveness at Home (REACH) Act of 2016 by Congressman Tiberi (R-OH) and Congressman Larson (D-CT).
Instead, as part of the recently enacted Tax Cuts and Jobs Act (TCJA), beginning in 2022, Section 174 R&D costs that are used to calculate the R & D tax credit will need to be amortized over five years instead of being afforded immediate deduction. If kept in place, this rule change will significantly dampen our already weak R&D tax incentive on the global stage, beginning in 2022.
Considering The Effect
Congress should seriously consider the effect of this rule change on future R & D investment in the US and revert to existing law which allows for the current deduction of all Section 174 costs.
In addition, Congress should embrace proposals such as the bi-partisan REACH Act, which will strengthen our R & D tax credit in this ever increasingly competitive global environment.