The United States was one of the first industrialized countries during the postwar period to recognize the importance of private-sector research and development by giving it favorable treatment in the tax code. Now Washington looks poised to move in the opposite direction, slashing the deductibility of R&D expenses as other countries offer more generous tax benefits. In the case of China, an innovative company can expense 200% of its R&D outlays in the year they occur. In the U.S., a recent change in tax law would limit the deductibility of allowable expenses to 100%, and require that the amortization of those expenses be spread out over five years. From both an economic and a security perspective, this looks penny-wise and pound-foolish. Lawmakers who are conversant with the issue now realize that tightening the tax benefits for R&D was a mistake, but that isn’t enough: they need to prevent the new rule from going into effect. That means amending the relevant section of the Internal Revenue Code, and Congress is running out of time. If action is not taken quickly, billions of dollars in private R&D will cease each year and America’s ability to stay ahead of China in the race for technological supremacy will be diminished. I have written a commentary for Forbes here.
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