Congress took an important step to promote US competitiveness by expanding the refundable research and development (R&D) tax credit in the Inflation Reduction Act. Gusto has advocated for doubling the amount of the credit to $500,000 per year, which would benefit startups and early stage companies. While this credit expansion is necessary, it is not sufficient to truly provide essential relief to innovative small businesses struggling to weather this current economic environment. Congress should take the next available opportunity to allow small and early stage companies the ability to deduct their R&D expenses in the year they were incurred rather than over five years.
The Tax Cuts and Jobs Act of 2017 changed the long-standing policy of allowing companies to immediately expense their R&D investments. This change went into effect for the 2022 tax year and will disproportionately impact small and early stage companies who claim the credit through payroll deductions rather than on their income tax return to offset liability.
Gusto platform data tells the story of how innovative small businesses will be negatively impacted by the change to a five-year amortization schedule from immediate expensing. Here are some facts about the companies that qualify for the R&D tax credit through Gusto using Ardius:
- Employers range from fewer than 15 employees to companies with hundreds of employees.
- The qualifying Federal credit size ranges from a few thousand dollars to several hundreds of thousand dollars.
- Qualifying companies on Gusto’s platform are located across the United States and come from a variety of industries: healthcare, financial services, communications, technology, manufacturing, etc.
- Gusto and Ardius customers claim the credit through payroll deductions and income tax returns.
What this means in practice is that if current law is not changed, a hypothetical manufacturing business in Ohio that qualifies on Gusto’s platform for the R&D credit will only be able to claim a ~$10,000 tax deduction as opposed to ~$50,000 for R&D investments they made in 2022. This reduction is significant, putting additional constraints on the manufacturing company during a precarious economic time and having real opportunity costs of lower investment, or a reduction of their labor force or benefit offerings.
New businesses on Gusto’s platform cite tax credits as a top need for their businesses to succeed in the current economic climate. Congress has prioritized increasing American innovation and competitiveness, and they can help fulfill that goal by building on the R&D credit expansion and allowing companies to immediately deduct their R&D expenses. It is essential that Congress take the next opportunity to make this simple and fair fix to give support for small businesses and boost our economy during these precarious economic times.