THE POLITICAL PULSE: POLITICAL ADVOCACY

POLITICAL ADVOCACY

A Big Part of What We Do for You

CHRISTY TARALLO

I was recently reminded of the quote, “Just because you do not take an interest in politics doesn't mean politics won't take an interest in you.” Originally quipped by the ancient Greek politician and commander Pericles circa 400 BC, the significance—and truth—of his statement has yet to diminish. Fortunately for ACEC Georgia members, one of the perks of ACEC membership is having a team of lobbyists that advocate on behalf of both individual firms and the entire industry in Georgia and across the nation. It’s our job to analyze, strategize, and react to the real-world impacts of both proposed and already enacted policies.

One such policy that is currently wreaking havoc on our industry is the amortization of research and development (R&D) expenses, the effects of which have imposed shockingly high tax liabilities on engineering firms.

Since 1954, businesses have been able to deduct qualified research expenses from their taxes within the year those expenses were incurred as a way to bolster American led R&D. Decades later in 1981, Congress created the related R&D tax credit, allowing firms to deduct the costs of research and development from their total tax bill. This policy has had immense success, particularly among engineering firms. It has allowed them to innovate for the future and even has the added benefit of quelling the fear of failure by softening the financial sting of unsuccessful projects. This has resulted in positive developments and valuable innovations in the built environment.

R&D tax credits are a powerful tool that have both fostered and hastened the pace of American ingenuity, a trend that has caught on globally. In fact, a 2021 analysis of the 37-member countries of the Organization for Economic Co-Operation and Development (OECD), which includes the UK, US, Japan, and South Korea, found that only two of the OECD member countries did not have preferential tax treatment for R&D.

The success of these tax incentives for R&D hasn’t been entirely lost on Congress. In the Tax Cuts and Jobs Act of 2017, Congress didn’t seek to repeal these incentives entirely, but rather to claw back the credits by revising how firms could deduct the expenses. The result: R&D amortization, beginning on January 1, 2022, which was a misguided approach. In simpler terms, firms can no longer deduct the full amount of these qualified expenses within the year they were incurred but must deduct those expenses over the course of five years.

Unfortunately, this policy has resulted in significant cash flow problems for engineering firms, both large and small, as their 2022 tax bills reflect only 1/5th of the R&D tax credit they have utilized for over four decades, resulting in unexpected—and unbudgeted—tax liabilities.

“The R&D Amortization issue is hitting our member firms in a variety of manners.” Said 2023-2024 ACEC Chairman and Chief Growth Officer of CHA, Jay Wolverton. “Some firms are needing to draw down on credit lines or go into their reserves to pay a greater tax obligation caused by the change in law. As firms expend these funds, there are fewer resources for needed salary raises or investments in technology within our companies.”

Real world examples from across the nation are plentiful. ACEC National submitted the following statement to Congress in support of the repeal of the amortization requirement: “A recent start up civil engineering firm in Georgia with approximately $1 million in revenue owes an additional $100,000 in tax due to R&D amortization”

And in yet another harrowing example from the support statement, “A midsize firm with 125 employees based in Kansas paid an additional $2 million on tax filing day this year, which will delay critical equipment purchases in the near term”

In addition to the cash flow issue for firms, amortization is disincentivizing R&D and greatly diminishes the competitive advantage of the United States, as we fall behind other countries that provide greater incentives for innovation. And further exacerbating the problem, the IRS has yet to issue compliance guidance for determining the difference between R&D expenses that are eligible for the tax credit and regular business expenses.

Fortunately, there are bipartisan, bicameral proposals to address this critical issue. In the House, Congressmen Ron Estes (R-Kansas) and John Larson (D-Connecticut) have introduced H.R. 2673 (the “American Innovation and R&D Competitiveness Act”), and in the Senate, Senators Maggie Hassan (D-New Hampshire) and Todd Young (R-Indiana) have introduced S. 866 (the “American Innovation and Jobs Act”), to repeal the harmful R&D amortization provision.

ACEC has taken a strong support stance for both of these bills and is working with a powerful coalition that is advocating for their passage.

While these bills make their way through Congress, you can rest assured that even if you don’t take an interest in politics, ACEC is working on this issue as well as all issues at the national, state, and local levels of government to protect you and your firms by fighting for policies that will positively impact the business climate for A/E/C firms.