Berks County News

WASHINGTON, D.C. — On June 6, Chairman of the Small Business Subcommittee on Economic Growth, Tax, and Capital Access, Congressman Dan Meuser(PA-09), hosted a hearing titled “American Ingenuity: Promoting Innovation Through the Tax Code.”

Throughout the hearing, Members of the Committee and witnesses examined tax policies that help businesses thrive. Particularly of interest were the R&D Tax Credit and Bonus Depreciation.

Witnesses included Julie Masser Ballay, Vice President and Chief Financial Officer, Sterman Masser Inc., and Bill Wydra, President, Ashland Technologies – both from Schuylkill County, Pennsylvania.

Rep. Meuser said, “At a time when U.S. adversaries are investing more and more in innovation, Congress must reflect on the impact that removing incentives to innovation will have on our nation’s job creators. The repeal of the R&D Tax Credit and the sunsetting of bonus depreciation, coupled together, will have grave consequences on American entrepreneurs. Congress must fight to protect these vital provisions. We cannot continue to cede our competitive advantage and risk falling behind dangerous adversaries on the world stage. I thank our witnesses and business leaders from Schuylkill County for attending today’s hearing and sharing their stories with the Committee.”

Wydra said, “I thank each and every one of you for further advancing my belief in the American way. The fact that we’re all sitting here having this particular subject discussed is very important to us and again restores for me that you care. A lot of times you’re on the front lines and you think you’re fighting a battle all by yourself, but meetings like this and the fact that you’re taking the time to organize this and want to hear from us, and genuinely want to hear from us, that goes a long way in helping us want to grow this company and grow this country even further.”

Wydra continued, “The proposed tax changes scheduled to go into effect regarding bonus depreciation and research and development tax credits will add one more significant mark for the negative column as we weigh these decisions and would most likely put a stop to these for several years or potentially permanently. Cash flow is always tight for most small businesses and this is particularly true of manufacturers who are much more capital intensive. These tax code changes put an increased burden on already limited cash flow in form of increased estimated quarterly and annual tax payments. This will limit our ability to support debt coverage for new building expansion and equipment investments and reduce available cash for hiring and further talent development programs.”

Masser Ballay said, “Small and family-owned businesses are the backbone of the American economy. In order to remain competitive, particularly in the agricultural sector, we need to be able to keep up with the speed of innovation of larger corporations. Taking advantage of bonus depreciation, and using that to reinvest in our business, assists us in accomplishing this so that we can continue to provide a good work environment for our employees and put food on the tables of families in America.”

A link to the full hearing can be found here.

Background:

American innovation requires businesses to invest in research and development (R&D). Often, R&D is a difficult investment for smaller businesses to make because of the high opportunity cost of capital and the longer time horizon to see a return on investment. To incentivize innovation, the U.S. tax code provides incentives for businesses to invest in R&D and necessary resources. The R&D tax credit and bonus depreciation provisions help small businesses make significant R&D investments.

R&D expensing and bonus depreciation are different tax provisions that allow businesses to recover the costs of investment in intangible and tangible assets, respectively. Since 1954, the United States has allowed for the immediate write-off of R&D expenditures to encourage R&D  spending in the private sector. World War II spurred additional federal investment and following the end of the war, Congress believed that investment in R&D was critical both to national security and Americans’ quality of life.

The Internal Revenue Act of 1954 created Section 174 of the Internal Revenue Code that allowed for the immediate expensing of qualifying R&D expenditures or amortizing them over a period of five or more years. The immediate expensing option of Section 174 was repealed after the 2021 tax year, and now, small businesses must spread this tax credit out over five years.

Bonus depreciation addresses the expensing of tangible assets such as equipment and machinery. The tax incentive was created by the Job Creation and Worker Assistance Act of 2002 following 9/11 to encourage investment and stimulate the economy.  From 2002 – 2017, businesses could write off 50 percent of eligible assets.

The Tax Cuts and Jobs Act (TCJA) included a provision allowing for the full and immediate expensing, known as 100 percent bonus depreciation, for qualifying purchases. Beginning in 2023, bonus depreciation will decrease by 20 percent each year (80 percent in 2023, 60 percent in 2024, 40 percent in 2025, 20 percent in 2026, 0 percent in 2027).

The U.S. prides itself on being a top innovator across sectors, however, many of our economic competitors have tax incentives for R&D that match if not exceed the U.S. pre-TCJA R&D incentive structure. In 2020, tax support by federal and state governments accounted for only 9.5 percent of R&D spending in the U.S. economy. Some experts argue that the U.S. would have to raise that rate to at least 15.5 percent for our country to remain competitive from an R&D standpoint.

Before immediate expensing was repealed, China’s R&D tax incentive was 2.7 times more generous than the U.S. and since then, the U.S. has fallen even further behind. As of January 1, 2021, China allows manufacturers to deduct 200 percent of eligible R&D expenses. As of January 1, 2022, China allows small and medium sized technological enterprises, non-profit scientific and technological R&D institutions, and higher education institutions to deduct 200 percent of qualified expenses.

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Original source can be found here.