Allowing Transferable R&D Tax Credits Could Boost Innovation
In order for the United States to maintain its position as the world’s leading economy and effectively compete with countries like China, it must enhance its innovation capabilities. One effective way to achieve this is by making the federal research and development tax credit transferable. This would not only unlock the credit’s full potential but also drive economic growth and facilitate increased research and development (R&D) efforts, especially within the small business sector.
The research and development tax credit was established by Congress in 1981 as a means to stimulate growth. However, the current structure of the tax credit has limitations that hinder its impact. One major issue is that companies can only redeem credits when they have taxable income, which typically occurs years after the initial R&D investment is made. This delay diminishes the incentive’s value and effectiveness, especially for businesses that rely on immediate capital to fuel innovation.
As Congress deliberates on new tax policies, one critical decision is whether to continue the amortization of R&D expenses under Section 174. This section can create significant tax liabilities for companies and has been a point of contention. While a full repeal of Section 174 is estimated to cost $150 billion, targeted relief for small businesses could cost less, given that they represent a smaller percentage of R&D spending.
To ensure that the R&D tax credit incentivizes investment effectively, Congress must direct funds towards businesses that are most likely to increase their current R&D spending. Failing to take action could result in the US falling behind other countries in terms of technological advancements.
While tech giants are often seen as the main innovators, it is actually small businesses that drive groundbreaking discoveries. Large companies excel at scaling and commercializing technology, while small businesses are the pioneers of new ideas but lack the financial means to bring them to fruition. Therefore, it is crucial to support small businesses in their innovation efforts by allowing them to benefit from R&D tax credits immediately.
By making the R&D tax credit transferable, small businesses would be able to sell their credits for immediate capital. This would enable them to reinvest in innovation quickly, hiring more engineers and accelerating product development. The ability to sell tax credits would provide small businesses with the necessary funding to boost their R&D efforts and remain competitive in the global market.
Concerns about the misuse of transferable tax credits can be mitigated through the implementation of safeguards such as certified intermediaries, transaction transparency, and compliance measures. Ultimately, making the R&D tax credit transferable would not lead to an increase in the deficit but rather improve cash flow and stimulate economic growth.
Ensuring that the US remains at the forefront of innovation is essential for long-term economic viability. By strengthening the R&D tax credit and making it transferable, Congress can empower small businesses to drive innovation, foster economic growth, and yield greater returns for taxpayers. The time to act is now, as innovation is the key to sustaining the nation’s economic prosperity.
