For nearly 70 years, American businesses were permitted to deduct 100 percent of research and development expenses from taxable income in the year those expenses were incurred. This favorable tax treatment promoted innovation by incentivizing investments in research and technological advancement — leading to countless scientific breakthroughs, powering economic growth and producing many significant commercial and military advantages for the U.S.
But when Congress passed the Tax Cuts and Jobs Act (TCJA) in 2017, it changed the tax treatment of R&D in order to partially off-set the revenue impact of cutting taxes. Starting in tax year 2022, businesses are now required to amortize R&D investments over five to 15 years (depending on where the R&D was conducted), dramatically increasing their annual tax liability and disincentivizing innovation-generating investments.
The House of Representatives voted 357 to 70 in January to approve the Tax Relief for American Families and Workers Act, which reflects the bipartisan, bicameral tax framework announced earlier by House Ways and Means Committee Chairman Jason Smith (R-Mo.) and Senate Finance Committee Chairman Ron Wyden (D-Ore.). Among other important provisions, the legislation would restore aspects of Section 174 of the Internal Revenue Code relating to first-year expensing of R&D investment by American businesses. Senate Majority Leader Chuck Schumer has indicated that the Senate could consider the bill “in the weeks and months ahead.”
At a time when our nation’s status as the global innovation leader is at stake, the Senate should pass the legislation as soon as possible.
American startups are hit disproportionately by the R&D change, as they tend to invest heavily in developing, testing and improving their new product or service. A tax liability that is substantial and unexpected can be devastating for highly innovative but fragile new companies that earn little income in the crucial early years. We have heard numerous stories of desperation — entrepreneurs forced to take out emergency loans, remortgage their homes, plead with investors for additional capital, lay off essential staff or dramatically scale back business plans. Indeed, for many startups across the country, the sudden inability to write-off their R&D investments might well be fatal.
This reality is of enormous economic consequence, as studies have repeatedly demonstrated that startups are disproportionately responsible for the innovations that drive productivity growth and economic growth, and account for virtually all net new job creation.
TCJA’s change to Section 174 is especially damaging given the strategic imperative of preserving America’s innovation leadership in the face of heightened global competition, particularly from China.
For decades, China has worked relentlessly to wrest the mantle of global innovation leadership from the U.S. The Belt and Road global infrastructure initiative, the Made in China 2025 plan to dominate global manufacturing and the China Standards 2035 blueprint are critical aspects of China’s ambition to be the 21st century’s unrivaled economic superpower — all supported by spending on research and development growing at double-digit annual rates.
In March 2021, China released its 14th Five-Year Plan, which accelerated development of advanced technologies in seven strategic areas — artificial intelligence, quantum computing, integrated circuits, genetic and biotechnology research, neuroscience and aerospace. China also increased R&D spending by more than 7 percent annually through the end of 2025, began work on a network of national laboratories, revised regulations to facilitate the flow of venture capital into Chinese startups and increased bank lending and extended tax incentives to encourage more research and development.
If there were any lingering doubt about China’s ambitions, President Xi Jinping was crystal clear at China’s 20th Communist Party Congress in October 2022. In a two-hour speech to open the Congress, Xi declared that China will “accelerate efforts to achieve greater self-reliance and strength in science and technology ... will be guided by national strategic needs ... and resolutely win the battle of key and core technologies.”
To meet China’s competitive threat, America must redouble its commitment to aggressively pro-innovation policies. Unfortunately, TCJA’s change to Section 174 undercuts America’s innovation competitiveness. As Sen. Todd Young (R-Ind.) explained last year: “China currently provides a 200 percent ‘super deduction’ for R&D expenses that amounts to 20 times the amount allowed in the U.S. tax code. A manufacturing company in China that spends $100 on R&D gets to deduct $200. Even before this provision expired, the U.S. ranked 27th out of 37 OECD countries with respect to R&D incentives. Our strategic competitors know this and are taking advantage.”
The effort to restore first-year expensing of R&D investments is about more than tax rates and federal tax receipts — it is central to our nation’s long-term economic competitiveness and ability to win the future in a world in which power is defined in terms of technology and innovation.
With this critical reality in mind, we respectfully urge the Senate to pass the Tax Relief for American Families and Workers Act as soon as possible.
John R. Dearie is the president of the Center for American Entrepreneurship. Jennifer Grundy Young is the chief executive officer of the Technology Councils of North America.
