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Reviewing the Federal Tax Treatment of Research & Development Expenses (Muresianu & Watson)

Reviewing the Federal Tax Treatment of Research & Development Expenses por Alex Muresianu and Garrett Watson published by Tax Foundation (4/2021).

“Investment in research and development (R&D) is central for driving longterm technological change and innovation. The R&D tax credit and immediate expensing for R&D spending are two important ways the federal tax code provides incentives for R&D investment.

The economic literature on the R&D tax credit suggests that it increases R&D spending, although the magnitude of that increase and how much of that new research translates to new innovation is more ambiguous.

The R&D tax credit is complicated for firms to claim and smaller firms sometimes have a hard time accessing the credit. Simplifying the credit and ensuring it can be broadly accessible would make the U.S. more attractive for R&D investment. Making the R&D credit more generous is unlikely to be an effective tool for greater R&D investment unless paired with a more competitive business tax system.

Providing an immediate and full deduction for R&D costs is neutral tax treatment and helps incentivize firms to invest in R&D. However, under current law, firms will be required to amortize R&D costs over five years beginning in 2022, which would make the U.S. an outlier internationally and reduce our international competitiveness in R&D.

According to the Tax Foundation General Equilibrium Model, canceling R&D amortization would raise long-term GDP by about 0.1 percent, raise wages by nearly 0.1 percent, and create about 19,500 jobs.”

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