Senate Tax Bill Failure Has Painful Implications for Manufacturing R&D
Published on by Lauren Huster in Manufacturing, Tax Services
The failure of the Tax Relief for American Families and Workers Act (HR 7024) in the Senate has painful implications for research and development (R&D) expenses – and that hits the manufacturing industry hard.
The bill, which failed to garner enough support for passage due to policy disagreements, addressed several tax provisions – including the restoration of full R&D deductions, which matters a lot to manufacturers.
The backstory
Historically, Code Section 174 allowed businesses to expense current-year costs related to R&D. This policy was altered as part of a short-term fix during the creation of the Tax Cuts and Jobs Act (TCJA) to enable a reduction in the corporate tax rate.
The impact
The lack of ability to currently expense R&D costs has put a significant strain on small and medium-sized manufacturers, many of whom have seen a dramatic increase in their tax liability. In turn, that’s driven a decrease in innovation – and for some, even threatens the viability of their business.
Here’s an example: engineering firms (who rely heavily on constant innovation to remain competitive) may be forced to reuse existing plans instead of creating new ones, as the new provisions require amortization over six years rather than the immediate deduction under the prior law.
The bigger picture
The inability to deduct R&D expenses is not just a concern for individual businesses, it also has broader implications for the U.S. manufacturing sector on the global stage. Losing these deductions could potentially slow down innovation at a critical time for U.S. manufacturers to keep pace with international competitors, many of whom are doubling down on innovation investments.
Failure to pass the bill may also impact mergers and acquisitions, making it more difficult for larger companies to acquire smaller innovators who may be disincentivized or discouraged from developing new technology.
There’s hope…but timing is tight
The tax bill’s failure in the Senate is a major setback for manufacturers, particularly for those relying on R&D to build competitive advantage on an increasingly competitive world stage. While there’s hope for a resolution to this issue, timing is a significant concern. A potential fix may not come until late 2025 – and for many manufacturers, this could simply be too late.
Let’s talk.
Make sure you’re making the most of every tax credit and deduction for your manufacturing business – talk to one of our top manufacturing industry pros – as always, we’re here to help.
Even in the face of R&D deduction challenges, there are other ways to build a competitive advantage in the manufacturing space. Our Manufacturing Compensation & Benefits Benchmarking Report has data from manufacturers of all sizes throughout our region. You can also watch on-demand as Advanced Manufacturing Industry Partnership (AMIP) founding board member Will Healy III unpacks strategies for recruiting and retaining top talent (famously noting “you’re competing with free cheeseburgers”) in a wildly informative and entertaining session. The Top 10 Takeaways for Recruiting and Retaining Manufacturing Talent is another great resource (6-minute read).
