January Tax Deadline Poised to Shutter Small Businesses

An Urgent Call for Congress to Undo Damaging Tax Policy

This article was originally written by Javier Palomarez for Newsmax and can be found on their website here

A rapidly approaching tax payment deadline is poised to shutter small businesses throughout our nation.

Small businesses pay estimated taxes throughout the year, and that first payment is due on January 15th. However, the Tax Cuts and Jobs Act (TCJA) limited businesses' ability to write off Research and Development (R&D) expenses found in Section 174 of the U.S Tax Code. These expenses include anything from scientific research to developing new programs and even exploring new farming techniques. Many businesses are now responsible for a much higher tax bill. In some cases, these increases can be 400% year-over-year.

This change, passed back in 2017 but phased-in during 2022, threatens to tear down our economy’s last line of defense. With fears of economic stagnation, we need congress to act now and support the small businesses that keep our economy afloat.

For nearly 70 years, the United States had incentivized small business ingenuity and innovation via the tax code, by allowing full write-offs for R&D expenses. Unfortunately, Congress changed the tax code to limit business to writing off just 10-20% of their R&D expenses each year. Ultimately this change diminishes the value of U.S. jobs, innovation, and competitiveness.

According to the national association of manufacturers, wages and salaries account for 75% of R&D spending, with R&D jobs paying an average wage of more than $155,000. Further, every $1 billion in R&D spending supports 17,000 jobs. Ultimately, the money spent on R&D accounts for about 5% of our nation's GDP - if R&D spending is reduced, jobs will be lost and our GDP will suffer.

Anecdotally, MasTec, an infrastructure company and America’s largest Hispanic-owned firm, has seen hundreds of millions of dollars in tax deductions deferred, significantly increasing their cash tax payments. This money could have otherwise been invested in creating new jobs, exploring clean energy and even contracting with small and minority-owned businesses.

Thankfully, Congress now has the opportunity to undo this harm by seamlessly restoring the full, same-year deductibility of R&D expenses. Last year marked the first time since 1954 that companies were penalized for investing in R&D. As we approach the New Year’s first payment deadline, those businesses are faced with an impossible decision: Do they lay off staff? Do they close their doors? Do they take on more debt? Do they dip into their savings and retirement accounts?

It is troubling that we are expecting these small enterprises to excel in an environment that restricts innovation, and that treats these R&D investments differently than virtually all other developed countries in the world. The economic benefits of R&D spend are not to be ignored, either.

This tax code endangers millions of small and medium businesses, and threatens to give adversaries like China a leg up in development by stifling domestic innovation. Fostering innovation in American small business should be a top priority for legislators and is a matter of national security. By pushing innovation abroad, our intellectual property goes in lockstep. It is one of the many reasons that China is currently filing 3 times as many patents as the United States each year.

For the sake of our economy, it’s critical that leaders on Capitol Hill quickly fix the R&D tax ahead of the upcoming IRS payment deadline on January 15th, before more small businesses are forced to close their doors.