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1 Robert Bellafiore, Amortizing Research and Development Expenses under the Tax Cuts and Jobs Act 1 (2019)

handle is hein.taxfoundation/amtzrd0001 and id is 1 raw text is: FISCAL FACT No. 635 Feb. 2019 The Tax Foundation is the nation's leading independent tax policy research organization. Since 1937, our research, analysis, and experts have informed smarter tax policy at the federal, state, and local levels. We are a 501(c)(3) nonprofit organization. ©2019 Tax Foundation Distributed under Creative Commons CC BY NC 4.0 Editor, Rachel Shuster Designer, Dan Carvajal Tax Foundation 1325 G Street, NW, Suite 950 Washington, DC 20005 202.464.6200 taxfoundation.org Amortizing Research and Development Expenses Under the Tax Cuts and Jobs Act Robert Bellafiore Policy Analyst Key Findings Currently, businesses can choose to fully expense the costs of research and development (R&D); that is, they can deduct the costs of R&D from their taxable income in the year that those costs occur. Expensing is the proper tax treatment of investment and other business costs, as it prevents a firm's profits from being overstated in real terms. This lowers the cost of investment. Requiring a firm to amortize business costs over a number of years overstates the firm's taxable income, reducing business capital investment. Starting in 2022, the Tax Cuts and Jobs Act (TCJA) will require companies to amortize their R&D costs over five years, instead of deducting them immediately each year. This change will raise the cost of investment, discourage R&D, and reduce the level of economic output. Canceling amortization of R&D costs would result in a 0.15 percent larger economy, a 0.26 percent larger capital stock, 0.12 percent higher wages, and 30,600 full-time equivalent jobs. Canceling amortization would reduce federal revenue by $119 billion on a conventional basis between 2019 and 2028, and by $99.2 billion on a dynamic basis. In the long run, it would reduce federal revenue by $8.43 billion each year, in 2019 dollars. The costs of canceling amortization could be offset by eliminating two tax expenditures: the credit union exemption and the rental loss exemption.

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