U.S. CFOs Ask Congress to Repeal Change to R&D Tax Rules

For decades, businesses were allowed to deduct certain R&D expenses straight away to reduce their taxable income. But under a provision of the 2017 Tax Cuts and Jobs Act that took effect this year, R&D expenses must be amortized over five years domestically and 15 years for international costs. Companies, including the 178 signatories, in recent weeks have signaled to investors that they are looking for Congress to once again allow companies to deduct these expenses immediately. 

In the letter reviewed by the WSJ’s CFO journal, finance chiefs warn of “grave harm” created by the amortization requirement and say the change goes against a practice that companies previously followed for nearly 70 years. The letter was sent to U.S. House of Representatives Speaker

Nancy Pelosi,

House Minority Leader Kevin McCarthy, Senate Majority Leader

Chuck Schumer

and Senate Minority Leader

Mitch McConnell.

The four lawmakers didn’t immediately respond to requests for comment. 

Additional signatories include

AT&T Inc.,

Cisco Systems Inc.,

Kimberly-Clark Corp.

,

Netflix Inc.

and

Dell Technologies Inc.

The companies either didn’t immediately respond to requests for comment or declined to comment beyond the letter. 

The change in how deductions are treated was included to help offset the fiscal costs of the corporate rate cut that came with the Tax Cuts and Jobs Act. It has been projected to raise $29.1 billion for the government’s fiscal year that ended Sept. 30, according to the Joint Committee on Taxation, which provides nonpartisan analysis of tax legislation for Congress. 

On companies’ financials, the shift delays the deductions rather than changing the total, as companies are simply spreading them out either over a period of five or 15 years, tax advisers and attorneys say. But companies that regularly invest in R&D will perpetually have a time horizon for deductions, said Jorge Castro, a tax partner at law firm Miller & Chevalier Chartered, who spoke generally. 

Companies are currently assessing how much can be deducted to offset those expenses, Mr. Castro said. Rising interest rates, high inflation and a cooling economy have made that calculation more important than when the law was enacted in 2017 as it is more appealing financially for companies to have the benefit now versus over five or 15 years. “When you spread out the deduction over five years, that is less powerful than incurring the deduction in the first year,” Mr. Castro said. 

U.S. companies spent an estimated $532 billion on R&D in 2020, representing the lion’s share of what the U.S. as a country allocates to it, according to the National Center for Science and Engineering Statistics, a statistical government agency. A 2019 report from Big Four accounting firm Ernst & Young forecasts that U.S. R&D spending would be cut by $4.1 billion a year for five years because of the change and then by $10.1 billion annually for the subsequent half-decade. 

The 178 finance chiefs said the amortization requirement may result in a loss of more than 23,000 U.S. R&D jobs a year over a period of five years, pointing to the 2019 EY report. It also creates risks to the U.S.’s national security as sustained spending on research and development is critical to that, the letter said. 

Close to a dozen countries including China, the U.K. and Greece offer a so-called “super deduction” for R&D expenses, which means companies get more than a 100% deduction on R&D spend, according to CFOs. “On a level playing field, the U.S. can compete for R&D investment with any country in the world,” the letter read. “Unfortunately, the current playing field is tilted against the U.S., and every day this policy continues to be in place makes it harder for the U.S. to remain a global leader in innovation.” 

Companies in the U.S. can still take a credit for their increased spending on qualifying research and development. Tax deductions are subtractions from taxable income while tax credits get subtracted from the amount of tax owed. The credits along with the deductions incentivize companies to invest in innovation, tax attorneys said.

Over the course of this year, companies have been making estimated tax payments that incorporate the R&D change, tax attorneys said. If Congress went back to immediate deductibility, those companies would likely see refunds, though that can take several months, they added. 

Aerospace and defense company Raytheon in October said it made a tax payment that was $1.5 billion higher than before because of the change to R&D amortization. “We’re hoping, again, [that] we’re going to get a tax law change here at the end of the year with tax extenders which, as you know, will give us a refund of the $1.5 billion that we’ve already paid,” Chief Executive Officer

Gregory Hayes

told analysts on an Oct. 25 call. The Arlington, Va.-based company declined to comment further. 

Huntington Ingalls Industries Inc.

said the impact of the change for the military shipbuilding company would be roughly $250 million this year through 2024, in aggregate. “We think there is interest there up on the Hill,” CFO Thomas Stiehle said when asked if he expected the rule to change, according to an earnings call transcript. If the law changes, that means a $250 million positive impact to free cash flow, in aggregate over the 2022 to 2024 time period, he said. “I’m hopeful that it does get changed, but we’ll just have to see how that plays out.” Huntington Ingalls Industries declined to comment beyond its earnings call.

Lawmakers are set to return to Washington this month for a lame-duck session, which usually occurs between the Nov. 8 midterm elections and a new congressional session in January. On the agenda: Agreeing on funding the government to avoid a shutdown, aid for Ukraine, alongside potential changes to the treatment of R&D expenses.  

There is bipartisan support for returning to immediate deductibility for R&D expenses, though Democrats would like to see it paired with an extension of the enhanced child tax credit, a measure that lapsed last year and that some in Congress are looking to renew. 

When it comes to a potential repeal or deferral related to R&D deductibility, timing is crucial, said Shelby Ford, a tax partner at Crowe LLP, a public accounting, consulting and technology firm. “Public companies have had to deal with this through their filings throughout the year. If you repeal it after they have closed the books, that makes it very messy to unwind,” Ms. Ford said. 

—Richard Rubin contributed to this article.

Write to Jennifer Williams-Alvarez at [email protected]

For decades, businesses were allowed to deduct certain R&D expenses straight away to reduce their taxable income. But under a provision of the 2017 Tax Cuts and Jobs Act that took effect this year, R&D expenses must be amortized over five years domestically and 15 years for international costs. Companies, including the 178 signatories, in recent weeks have signaled to investors that they are looking for Congress to once again allow companies to deduct these expenses immediately. 

In the letter reviewed by the WSJ’s CFO journal, finance chiefs warn of “grave harm” created by the amortization requirement and say the change goes against a practice that companies previously followed for nearly 70 years. The letter was sent to U.S. House of Representatives Speaker

Nancy Pelosi,

House Minority Leader Kevin McCarthy, Senate Majority Leader

Chuck Schumer

and Senate Minority Leader

Mitch McConnell.

The four lawmakers didn’t immediately respond to requests for comment. 

Additional signatories include

AT&T Inc.,

Cisco Systems Inc.,

Kimberly-Clark Corp.

,

Netflix Inc.

and

Dell Technologies Inc.

The companies either didn’t immediately respond to requests for comment or declined to comment beyond the letter. 

The change in how deductions are treated was included to help offset the fiscal costs of the corporate rate cut that came with the Tax Cuts and Jobs Act. It has been projected to raise $29.1 billion for the government’s fiscal year that ended Sept. 30, according to the Joint Committee on Taxation, which provides nonpartisan analysis of tax legislation for Congress. 

On companies’ financials, the shift delays the deductions rather than changing the total, as companies are simply spreading them out either over a period of five or 15 years, tax advisers and attorneys say. But companies that regularly invest in R&D will perpetually have a time horizon for deductions, said Jorge Castro, a tax partner at law firm Miller & Chevalier Chartered, who spoke generally. 

Companies are currently assessing how much can be deducted to offset those expenses, Mr. Castro said. Rising interest rates, high inflation and a cooling economy have made that calculation more important than when the law was enacted in 2017 as it is more appealing financially for companies to have the benefit now versus over five or 15 years. “When you spread out the deduction over five years, that is less powerful than incurring the deduction in the first year,” Mr. Castro said. 

U.S. companies spent an estimated $532 billion on R&D in 2020, representing the lion’s share of what the U.S. as a country allocates to it, according to the National Center for Science and Engineering Statistics, a statistical government agency. A 2019 report from Big Four accounting firm Ernst & Young forecasts that U.S. R&D spending would be cut by $4.1 billion a year for five years because of the change and then by $10.1 billion annually for the subsequent half-decade. 

The 178 finance chiefs said the amortization requirement may result in a loss of more than 23,000 U.S. R&D jobs a year over a period of five years, pointing to the 2019 EY report. It also creates risks to the U.S.’s national security as sustained spending on research and development is critical to that, the letter said. 

Close to a dozen countries including China, the U.K. and Greece offer a so-called “super deduction” for R&D expenses, which means companies get more than a 100% deduction on R&D spend, according to CFOs. “On a level playing field, the U.S. can compete for R&D investment with any country in the world,” the letter read. “Unfortunately, the current playing field is tilted against the U.S., and every day this policy continues to be in place makes it harder for the U.S. to remain a global leader in innovation.” 

Companies in the U.S. can still take a credit for their increased spending on qualifying research and development. Tax deductions are subtractions from taxable income while tax credits get subtracted from the amount of tax owed. The credits along with the deductions incentivize companies to invest in innovation, tax attorneys said.

Over the course of this year, companies have been making estimated tax payments that incorporate the R&D change, tax attorneys said. If Congress went back to immediate deductibility, those companies would likely see refunds, though that can take several months, they added. 

Aerospace and defense company Raytheon in October said it made a tax payment that was $1.5 billion higher than before because of the change to R&D amortization. “We’re hoping, again, [that] we’re going to get a tax law change here at the end of the year with tax extenders which, as you know, will give us a refund of the $1.5 billion that we’ve already paid,” Chief Executive Officer

Gregory Hayes

told analysts on an Oct. 25 call. The Arlington, Va.-based company declined to comment further. 

Huntington Ingalls Industries Inc.

said the impact of the change for the military shipbuilding company would be roughly $250 million this year through 2024, in aggregate. “We think there is interest there up on the Hill,” CFO Thomas Stiehle said when asked if he expected the rule to change, according to an earnings call transcript. If the law changes, that means a $250 million positive impact to free cash flow, in aggregate over the 2022 to 2024 time period, he said. “I’m hopeful that it does get changed, but we’ll just have to see how that plays out.” Huntington Ingalls Industries declined to comment beyond its earnings call.

Lawmakers are set to return to Washington this month for a lame-duck session, which usually occurs between the Nov. 8 midterm elections and a new congressional session in January. On the agenda: Agreeing on funding the government to avoid a shutdown, aid for Ukraine, alongside potential changes to the treatment of R&D expenses.  

There is bipartisan support for returning to immediate deductibility for R&D expenses, though Democrats would like to see it paired with an extension of the enhanced child tax credit, a measure that lapsed last year and that some in Congress are looking to renew. 

When it comes to a potential repeal or deferral related to R&D deductibility, timing is crucial, said Shelby Ford, a tax partner at Crowe LLP, a public accounting, consulting and technology firm. “Public companies have had to deal with this through their filings throughout the year. If you repeal it after they have closed the books, that makes it very messy to unwind,” Ms. Ford said. 

—Richard Rubin contributed to this article.

Write to Jennifer Williams-Alvarez at [email protected]