U.S. Reps. Dan Meuser (R-PA) and Roger Williams (R-TX) are urging the House Ways and Means Committee to consider the impact on small businesses of specific proposed changes to the tax code.
Meuser said that R&D expensing and bonus depreciation are critical to innovation. Before 2022, businesses were able to fully expense qualifying R&D expenditures in the year in which they occurred. Now, he said, businesses must capitalize and amortize these expenditures over five years. As a result of this change, many small businesses have been hit with much higher tax bills than expected. Bonus depreciation is also set to decrease by 20 percent annually until it hits 0 percent in 2027.
In a letter to committee leaders, Meuser and Williams outlined how these changes to the tax code regarding research and development (R&D) expensing and bonus depreciation would impact small businesses.
“Last week, I convened a hearing in the Small Business Subcommittee on Economic Growth, Tax, and Capital Access titled ‘American Ingenuity: Promoting Innovation Through the Tax Code.’ It was evident from what we heard during the hearing that two provisions of the tax code that have already begun sunsetting, the R&D tax credit and bonus depreciation, are incredibly important incentives that enable small businesses to reinvest in their company and their employees,” said Meuser, chair of the Small Business Subcommittee on Economic Growth, Tax, and Capital Access. “I thank Chairman Williams for his support in highlighting this critical issue and also thank our witnesses, Julie Masser-Ballay and Bill Wydra, both Pennsylvania small business owners from my district, for sharing their insight on this very important topic.”
Meuser hopes that full expensing of the R&D expenditures and 100 percent bonus depreciation will both be restored as the Ways and Means Committee considers tax legislation in the coming days. This would allow small businesses to continue making investments in their businesses that benefit their workers and the economy, Meuser added.
At the hearing, Masser-Ballay, vice president and chief financial officer of Sterman Masser Inc., a family-owned and operated farm in Sacramento, Pa., testified on the potential impact.
“As a family business, the concern always exists that we will not be able to keep pace with larger companies or with rising costs while still addressing the needs of our employees. With a tight labor market in our region, we are always looking for ways to improve the work environment for our employees, improving safety and efficiency. Innovation allows us to be in a position to compete for employees and create higher-paying positions,” Masser-Ballay said at the hearing.
Wydra, president of Ashland Technologies in Hegins, Pa., also shared his thoughts at the hearing.
“The proposed tax changes scheduled to go into effect regarding bonus depreciation and research and development tax credits will add one more significant mark for the negative column as we weigh these decisions and would most likely put a stop to these for several years or potentially permanently,” Wydra said. “Cash flow is always tight for most small businesses, and this is particularly true of manufacturers who are much more capital intensive.”
In the letter, Meuser and Williams said that China’s R&D tax incentive was 2.7 times more generous than the United States prior to 2022 — and since then, the United States has fallen even further behind.
“To compete on the world stage, we must incentivize innovation through the tax code and fully utilize the innovative capacity of Main Street America. Otherwise, we will only continue to fall behind our adversaries in the innovation economy,” they wrote.