“At this important juncture, Congress should really stop and ask themselves if they want a tax policy that incentivizes the development of the next wave of technology abroad.”
Many articles in this forum and others have set forth lofty IP goals for the incoming Trump administration. Most of them are laudable. But there is one area that deserves more attention in terms of IP and tax policy: The United States needs to restore the ability to immediately deduct R&D expenses in the year in which they were incurred. And with all the talk of another tax bill being a top priority of the new Congress, there’s no time like the present.
So why is this important to the IP community? In short, because right now the U.S. tax code both (1) incentivizes technological development abroad rather than here in the United States, and (2) gives U.S. companies another reason to limit patent filings here at home and instead keep their treasures a trade secret.
How It Started
President Trump’s first tax cuts back in 2017 eliminated the ability to immediately deduct R&D expenses in the year in which they were incurred. The relevant statutory provision ultimately took effect in 2022, so from that point forward, U.S. companies have been required to capitalize and amortize R&D expenses over a five-year period (or more). Those R&D expenses include not just wages and other traditional R&D expenditures, but also patent costs that no longer qualify for R&D tax credits.
Let’s go over a simple example to illustrate the absurd impact of this policy on American business. Assume we’re dealing with an early-stage startup, which is where some of the most truly ground-breaking innovations happen. Under a very real hypothetical, if most of the startup’s costs in a given tax year were R&D expenses, that could actually result in the business owing tax on zero net income for that tax year.
Why would Congress do that?
Well, what happened was that, even back in 2017, Congress knew that these changes to R&D expensing were ill-advised and never intended for them to take effect. But to make the budget numbers work in support of other aspects of the bill, the ability to immediately deduct R&D expenses was eliminated. Congress just assumed they’d be able to revisit the issue later.
Naturally, that never happened.
True, there have been several bipartisan attempts at addressing this blunder, including in 2021, 2023, and 2024. However, all those efforts ultimately came up short in a divided government where tax reform just wasn’t a top priority over the last four years.
The Wrong Incentive
So here we are, three years into what has effectively become an additional tax burden on American innovation (as well as its patent protection). That is exactly what we don’t need right now, particularly with China already attracting loads of R&D themselves due to their “super deduction” policy. Under that policy, 200% of R&D costs are deductible for most businesses. You read that right – for every $1 spent on R&D in China, the business gets $2 worth of tax deductions.
What’s the impact of this imbalance? Well, it incentivizes investment abroad rather than here at home, bolstering the R&D of foreign corporations rather than our own. Plus, even for R&D that stays here in the United States, the current requirement that patent costs also be capitalized incentivizes U.S. companies to limit patent filings even further and instead keep their technology a trade secret.
Then when R&D goes abroad, what comes next? Lots of things, but for the purposes of this article, it’s that an ex-U.S. business develops useful technology rather than an American one. In addition, depending on foreign filing license requirements – and some of our adversaries have them – this often means that a foreign nation will know about important technological advances before we do. Then if the business becomes truly successful, it will have even more money to spend on R&D, increasing its innovation capacity even further. But still not in the United States. And so the doom loop continues.
A Great, Bipartisan Place to Start
At this important juncture, Congress should really stop and ask themselves if they want a tax policy that incentivizes the development of the next wave of technology abroad. With other tax proposals being more controversial, this one should be an easy win for both sides. So if Congress is really serious about encouraging American innovation, restoring the ability to immediately deduct R&D expenses would be a great place to start.
Image Source: Deposit Photos
Author: Feverpitch
Image ID: 10563036
