Death, Taxes, National Security and R&D Credits

November 7, 2023

By Mike Dodd, USMC (Ret.)

“In this world, nothing can be said to be certain, except death and taxes,” famously wrote Benjamin Franklin after the U.S. Constitution was ratified. And while this phrase from 1789 still holds true today, good ol’ Ben had no clue the IRS would allow credits for research and development activities—though, if he were around today, as an inventor, he’d certainly qualify! He likely couldn’t conceive that these credits can also help protect our country.

These days, R&D credits are not just nice to have, they can create real leverage for a small business. Take, for example, a company involved in some type of R&D activity (think developing new software, a new process, or any technology improvement) with gross annual revenue of $10 million. They would likely receive between $100,000-300,000 as a yearly credit (retroactive three years).

When it comes to national security, Microelectronics Commons (Commons), $2 billion allocated for defense-related semiconductor projects as part of the CHIPs & Science Act, the benefit of R&D tax credits has even further implications. The stated goal of Commons is creating a direct pathway to reduce the country’s reliance on foreign microelectronics and safeguard the nation from supply chain risks. But there’s an added potential boost for industry involved in Commons—tax credits related to projects. These Commons projects are 100% R&D-related. The numbers paint a compelling story. For example, a project with a value of $42 million, involving 10 employees, could qualify for up to $2.5 million in tax credits. That’s serious cash that a company could invest in scaling, building or other operational needs. And that’s the whole goal of these credits—they are meant to incentivize companies to engage in R&D by throwing them a financial bone in order to make the company more financially robust.

If you’ve been following developments with the R&D credits, you’re surely aware of some issues with amortization over five years. Yes, this is a problem—actually having the reverse effect of what the rule is intended to accomplish because companies are potentially losing more than seven percent of the credit due to inflation and lack of investment opportunities. That’s where my friend and fellow Marine, Senator Todd Young (who incidentally is the co-author of the CHIPs & Science Act) comes in. He has introduced the bi-partisan American Innovation & Jobs Act which aims to right the ship with regard to R&D credits and eliminate amortization.

“Maintaining and encouraging R&D activities here in the United States is critical to providing high-quality jobs for Americans and ensuring our country remains competitive with our international rivals, most notably China,” said Senator Young. “Our American Innovation and Jobs Act would ensure businesses can fully deduct R&D expenses each year and expand the R&D tax credit for startups and small businesses. If we want to out-compete and out-innovate the Chinese Communist Party, we must pass this legislation as soon as possible.”

The Chinese are outspending the U.S. on R&D. In 2021, Chinese firms spent $52.7 billion on R&D, while U.S. firms spent $35 billion, according to a recent report by the Hamilton Center on Industrial Strategy. The same report made this policy recommendation, “…if we want to reverse the process of Chinese firms closing the gap with U.S. firms on R&D investment, Congress needs to boost R&D tax incentivizes.”

Arguably, one of the greatest national security threats to the United States is China. With the passage of the CHIPs & Science Act, Congress has taken a huge, proactive approach to reversing decades of U.S. offshoring of technological design and manufacturing. The Department of Defense is leading the reshoring charge with the implementation of Microelectronics Commons. Now we need a full-court press with Congress bolstering tax policy to encourage R&D.

We can defeat the Chinese threat by using their own tactics. As the wise ancient Chinese general Sun Tzu famously said, “The supreme art of war is to subdue the enemy without fighting.” Winning the technology battle will ensure we will never fight a fair fight.