If you've been keeping up with the news, you're undoubtedly aware of a recent policy change that will impact how research and development (R&D for short) is handled regarding income taxes in the United States. Rather than being allowed to deduct those costs immediately, companies are now told to spread those costs out over five years.
Unsurprisingly, those companies are none too thrilled with that change. It has the potential to hurt manufacturers in several different ways, all of which are worth exploring.
The R&D Tax Policy Change: An Overview
In a letter that was sent on November 4, 2022, no less than 178 CFOs - primarily those from some of the biggest names in United States manufacturing, like Ford Motor Company, Lockheed Martin, Boeing, and others - outlined why they believe that these aforementioned new rules would lead to what they call a "competitive disadvantage" for American companies. This likely leads to job losses, harming their ability to innovate over the next decade.
Their point of view was simple: they were asking the current Congress to switch back to a system that allowed them to immediately deduct their costs regarding research and development as soon as the end of the year.
Generally, research and development investment spreads unevenly across the economy. It is heavily localized in a few key spaces, with manufacturing being chief among them. One recent study shows that the manufacturing sector accounts for 58% of all research and development costs.
To contextualize that differently, it means that the manufacturing sector would face a significant tax increase as per the research cited above - to the tune of $31.7 billion in 2023 alone, which is directly attributed to this new approach to R&D amortization.
It's equally important to note that, until January 1, 2022, businesses could deduct 100% of all expenses directly attributed to research and development in the same year they were incurred. On January 1, 2023, on the other hand, this new law goes into effect. This makes it more expensive to invest in advancements that will help innovate various sectors like manufacturing and the growth of these companies.
Many agree that this means that the sector will get hit. It will get hit significantly. This is a significant new expense - the fact that the tax liabilities of these companies are about to increase exponentially - that was not anticipated up to this moment.
One company that is particularly worried about the implications of this change is Miltec UV. Company leadership believes that an exciting new opportunity is within reach. They have spent years developing new technology for lithium-ion batteries - otherwise known as the rechargeable batteries found in countless devices like smartphones or tablets. This new technology could be used for next-generation electric vehicles.
Miltec UV has poured at least 11 years of development into manufacturing the electrodes used in these batteries. They've spent countless amounts of money on prototyping. Various proof concepts have been developed to indicate that these microbes can do what the company thinks they can. There has been testing. On top of it all, there is the cost of manufacturing the batteries. Officials agree that they are very close to the point where they can commercialize the batteries and begin to sell them, but with these new rule changes, that also means that they will have to pay more taxes than they previously thought they would.
If these tax changes are not reversed, industry leaders fear they will hurt profits in the short term. This could then negatively impact essential benefits that employees at manufacturing companies have come to count on.
For the record, Miltec UV is also an organization that funds all of its research and development efforts through the profits of its various commercial businesses. It has eschewed taking on outside investment in the past and hopes to continue to do so moving forward.
Regardless of whether Congress reverses these changes, one thing is for sure - this is a development that the entirety of the manufacturing industry will be paying close attention to moving forward.