Attention FAE Customers:
Please be aware that NASBA credits are awarded based on whether the events are webcast or in-person, as well as on the number of CPE credits.
Please check the event registration page to see if NASBA credits are being awarded for the programs you select.

Tax Change Affecting R&D Deductions Poses Danger to Some Smaller Businesses

S.J. Steinhardt
Published Date:
Oct 25, 2023

iStock-576919844 Research and Development

A change in the tax code affecting the deduction of research-and-development (R&D) costs, under a provision of the Tax Cuts and Jobs Act of 2017, threatens the survival of some small and medium-sized businesses, The Wall Street Journal reported.  

Under new rules that took effect last year, companies are required to amortize their domestic R&D costs over five years and their international ones over 15 years. For almost seven decades before the provision of the 2017 law went into effect, businesses were allowed to deduct certain R&D expenses immediately to reduce their taxable income.

The change in how deductions are treated was included in the 2017 law to help offset the fiscal costs of the law’s corporate rate cut, the Journal reported last November. The nonpartisan Joint Committee on Taxation projected that it would raise $29.1 billion for the government’s fiscal year that ended on Sept. 30, 2022. 

Last November, 178 chief financial officers (asked Congress to allow them, once again, to deduct their R&D costs immediately. Lockheed Martin expects its 2023 cash tax liability to increase by roughly $575 million because of the law, and Northrop Grumman anticipates paying around $720 million in additional tax payments this year, according to regulatory filings cited by the Journal.

But any congressional action may not be enough, or may be too late, for smaller firms, which have also lobbied lawmakers to change the law. The difference for them is that they cannot easily borrow to cover the tax bills.

Yelp CFO David Schwarzbach told analysts in February that its effective tax rate for 2023 was expected to rise to a range of between 32 percent and 38 percent, up from 18 percent in 2019, with the tax rule being a significant factor behind the increase, the Journal reported. He noted that small and medium-size businesses "have to really look at their burn rate, how much cash they are consuming in a month, and the runway.” He added, “Any time you have to divert capital to something, that shortens your runway.” 

“Anything that makes [smaller businesses] less competitive, less able to innovate, is going to have, I believe, an impact over time on new job creation,” he added.

Tristan Louis, founder of software business Casebook, learned in January that his tax liability for the nearly 50-person firm was more than $400,000. To survive, he had to cut staff by around 35 percent in March.

Rick Braun, who started Jasper, Ind.-based Robotic Solutions in 2018, last month learned his company’s tax liability was close to $70,000 because of the change. He had been expecting to owe nothing or event get a refund. Braun raided his retirement savings to pay it. “I was probably 30 days from having to lay off a couple of people,” he told the Journal.

Brian Dyer, CFO and chief operating officer of both Sterling ATM, which designs signage for bank ATMs, and off-road trailer business Bean Trailer, said that the two companies, together, owe 2022 and 2023 tax payments of between $2.5 million to $3 million. He said that he hopes to get an extension for his companies’ 2023 tax bill. But they must pay their 2022 bill of around $1.5 million this month. That will be covered by the companies’ reserves, which had been meant to be used for hiring and research. 

Without that capital, layoffs would have been necessary, he told the Journal. There are no more reserves, he said, “so there’s not another place for this to come from.” 

Click here to see more of the latest news from the NYSSCPA.