R&D Expensing raised during Trade Hearing

May 9, 2023

The importance for allowing businesses to expense their research and development outlays was highlighted during a congressional hearing focused on trade.

Raising the issue was a bit unconventional since the tax provision was not relevant to the subject of the hearing, which was trade and not tax.

Rep. Ron Estes (R-Kan.) warned that without R&D expensing in the U.S. companies could be lured to relocate in China, where an increasing amount of R&D costs can be deducted for tax purposes.

“China’s R&D expensing has grown up 400%,” he said during the House Ways and Means Committee hearing titled “Field Hearing on Trade in America: Securing Supply Chains & Protecting Workers.”

Estes and Rep. John Larson (D-Conn.) introduced the American Innovation and R&D Competitiveness Act last month. Larson also sits on the House Ways and Means Committee. Their bill provides immediate R&D expensing.

Currently, R&D costs cannot be expensed in the U.S. These costs are now amortized over five years if incurred within the U.S., and 15 years outside of the U.S.

Unlike the U.S., China is becoming more aggressive on R&D.

The People’s Republic of China (posted by English.Gov.CN):

According to China's 14th Five-Year Plan (2021-25), the country will scale up spending on R&D by more than 7 percent annually during the period to drive more technological breakthroughs.

Consultancy McKinsey and Co said in a report that such a growth target will set the country on the path to becoming the world's largest spender on R&D.

John Romano, CEO of mining company Tronox, testified before the committee today. He said that R&D expensing is essential for staying competitive with his Chinese rivals.

“From the standpoint of research and development, the only way we’re going to stay ahead of the Chinese is to invest in new technology,” he said, adding that expensing those cost in the year incurred is vital.

In some cases, technology can become outdated over a period of time, making amortization less attractive (i.e., new equipment is needed before the older equipment is fully written-off).

State of Play for R&D expensing in Congress:

Currently, there is no set plan for how (or if) Congress will deal with R&D outlays.

There is bipartisan support for R&D expensing, but some lawmakers will only support it if expanding the Child Tax Credit is also included.

Meanwhile, other lawmakers oppose an expansion of the Child Tax Credit and would likely oppose R&D expensing if the family tax break was included in the same bill.

Those who oppose a Child Tax Credit expansion say it’s too expensive to enact (roughly $1 trillion over ten years) and would worsen inflation.

Those who support a Child Tax Credit expansion say they would back something that would cost less than $1 trillion. However, they have yet to propose anything to the tax-writing committees on what they would support

Without knowing the specifics for how the Child Tax Credit should be modified, it is hard for lawmakers to negotiate an R&D/Child Tax Credit deal.  

Our April 28th Capitol Hill Recap has more on this subject:

Rumor Mill stuff:

  • One Democratic source told Eide Bailly that legislation could be introduced relatively soon that would spell-out how Democrats seek to expand the Child Tax Credit.   
  • A Republican source told Eide Bailly that House Ways and Means Chairman Jason Smith (R-Mo.), who is a proponent for providing family tax relief, could extend the expanded Child Tax Credit in the 2017 tax reform bill. That measure expires in at the end of 2025. Smith could extend it beyond this time.

Bottom line: We’re in wait-and-see mode on what Congress might do on R&D.

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