Startups struggle with new R&D tax rule

A 2022 tax rule requiring the amortization of research and development expenses has created significant challenges for many life sciences startups and small businesses. Previously, grant money received by these companies and spent on R&D could be deducted immediately in full, but the new rule forces them to spread the deduction over five years for domestic R&D and 15 years for overseas R&D.

This change disproportionately affects life sciences startups and small companies that are still in the early stages of development. With limited revenue and profits, these companies are now facing a significant tax burden that hinders their ability to invest in growth and innovation.

The new rule has sparked a bipartisan effort to repeal the amortization requirement. Sen. Thom Tillis (R-NC) and Sen. Ted Budd (R-NC) are among the cosponsors of the American Innovation and Jobs Act, which would restore full expensing for R&D costs. In the House, 191 representatives, including six NC Democrats (Don Davis, Valerie Foushee, Jeff Jackson, Kathy Manning, Wiley Nickel and Deborah Ross ) and two NC Republicans (Chuck Edwards and Greg Murphy) have co-sponsored a similar bill.

Proponents of repeal argue that the current rule stifles innovation and economic growth. They point to the significant role of R&D in driving technological advancements and creating jobs. By imposing a financial strain on startups and small businesses, the rule discourages investment in these critical areas.

Opponents of repeal argue that the rule helps to raise government revenue in the short term. They also point out that the deduction is still available, albeit spread out over a longer period. However, many argue that the long-term economic benefits of fostering innovation outweigh the short-term revenue gains.

In the meantime, many startups and small businesses are struggling to adapt to the new rule. They are forced to make difficult decisions about how to allocate their limited resources, often at the expense of growth and innovation. The outcome of the debate over the R&D tax rule will have a significant impact on the future of the life sciences industry and the broader economy.