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R&D Firms to Congress: Don’t Hang us Out to Dry with Apocalyptic Taxes

This article originally appeared in RealClearEnergy

Congress is on the verge of a bipartisan tax deal to support businesses and families–but will it come soon enough to protect countless small R&D firms from bankruptcy?

Last year, thousands of CEOs were shocked to hear research and development (R&D) investments would be taxed before they were able to generate profit to pay these taxes. A little-known provision of the 2017 Tax Cuts and Jobs Act (TCJA) had taken effect, threatening our nation’s R&D pipeline, from lifesaving medical interventions to sustainable tech.

>>>READ: Bipartisan Tax Agreement with Immediate Expensing Will Kickstart Innovation

Having worked with hundreds of startups and R&D firms over the past five years, our organizations have unfortunately had a front row seat to the shocking impacts.

Since 1954, businesses could fully deduct R&D expenses in the first year incurred. As of 2022, businesses must amortize these expenses over five years. The result is devastating. Thousands of innovative companies are now facing bankruptcy; 35% of companies surveyed that use this deduction reported needing to borrow money to pay new taxes and 19% might go bankrupt.

Congress owes it to our nation’s innovators to right this wrong before a new tax filing season begins.

“For us and thousands of other pre-revenue startups… [these taxes] are apocalyptic,” Emily Majewski explained. As CEO of PHYTOSTONE, she experiences the impacts directly: “Every dollar I spend feels like I am digging a grave of personal tax liability one dollar deeper.”

When Congress included the “Innovation Tax” last-minute in the TCJA, legislators assumed it would be reversed before taking effect five years later. Despite broad bipartisan support and devastating impacts on U.S. innovation, Congress has not yet acted. Legislators have abandoned one of the greatest sources of American innovation: small businesses.

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One such firm, Prapela, develops promising pediatric medical devices, which have received FDA recognition and NIH support. According to John Konsin, Prapela’s CEO, the innovation tax “threatens over twenty years of development and support from numerous clinical studies… Since NIH funds cannot be used to pay taxes, we are now at risk of securing FDA clearance and continuing our work.”

The hardest hit companies are those that participate in the Small Business Innovation Research (SBIR) Program, which has spurred thousands of innovations including Lasik eye surgery. It also provided funding in 1987 to a 6-person firm called Qualcomm, now a Fortune 100 company employing 50,000.

Before last year, a typical $2 million Phase II SBIR grant would not have been taxed as income. Starting in 2022 a firm would have been taxed on $1.8 million. For one company, this meant a tax bill of $700,000. For a pre-revenue firm, this is catastrophic, forcing layoffs or shuttered operations.
San Diego-based Inflexion Bioscience has made solid progress towards treating neurofibromatosis, a rare disease impacting 1 in 3,000. In 2022, it was funded exclusively by three NIH SBIR grants. According to Inflexion’s CEO, Herb Sarnoff, “Without the reversal of this provision, Inflexion likely will have to file for bankruptcy protection.”

Another CEO, Emily Majewski, secured over $500K in grants in 2023 for PHYTOSTONE, which develops natural building materials. She was devastated to realize the impact of the Innovation Tax, “I simply don’t know where the funds to pay for next year’s taxes are supposed to come from when my company is not currently selling goods nor services.”

>>>READ: New GOP Tax Bill Would Spur More Energy Innovation and Investment

For many impacted businesses, there simply is no way to make ends meet. Some have survived the first tax bill, but a second would be a death blow. CEOs have couched the tax in deadly terms, including “fatal,” “kiss of death,” or “poison pill.” That’s why over 1,000 small business leaders are calling on Congress to urgently resolve this issue, joining a chorus of stakeholders, founders, organizations, and North Carolina’s Secretary of Commerce.

Preposterously the U.S. is one of just two nations that taxes innovation. ITIF estimates the U.S. will drop to 32nd out of 34 leading economies on R&D tax policy. In contrast, China recently doubled its R&D deduction, joining 9 other countries with “super deductions.” Based on the Innovation Tax alone, EY projects U.S. R&D spending will drop up to $10.1 billion annually and cost 58,600 jobs each year.

Thankfully, a bipartisan group of 214 Representatives and 41 Senators have sponsored legislation to provide relief and Congressional leaders recently reached a deal to extend full deduction for domestic R&D expenses through 2025. While a step in the right direction, the bill falls short by not making it a permanent fixture in the tax code. The time for talk is over. We need Congress to act ahead of tax season and offer R&D firms a lifeline.

From GPS to the COVID vaccine, public R&D support has enabled game-changing breakthroughs. Our nation has long looked to innovators to carry this vision forward. Our innovators now look to Congress to ensure we don’t backslide on it.

Drew Bond, Co-Founder, President & CEO – C3 Solutions
Andy Barnes, Dir. of Policy and Communications – Clean Energy Business Network
Eva Garland, Ph.D., CEO and Founder – Eva Garland Consulting LLC

The views and opinions expressed are those of the author’s and do not necessarily reflect the official policy or position of C3.

Copyright © 2020 Conservative Coalition for Climate Solutions

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