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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 global
levels. We are a 501(c)(3) nonprofit
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Editor, Rachel Shuster
Designer, Dan Carvajal
1325 G Street, NW, Suite 950
Washington, DC 20005
Reviewing the Federal Tax Treatment
of Research & Development Expenses
Investment in research and development (R&D) is central for driving long-
term technological change and innovation. The R&D tax credit and immediate
expensing for R&D spending are two important ways the federal tax code
provides incentives for R&D investment.
• The economic literature on the R&D tax credit suggests that it increases R&D
spending, although the magnitude of that increase and how much of that new
research translates to new innovation is more ambiguous.
• The R&D tax credit is complicated for firms to claim and smaller firms
sometimes have a hard time accessing the credit. Simplifying the credit and
ensuring it can be broadly accessible would make the U.S. more attractive
for R&D investment. Making the R&D credit more generous is unlikely to
be an effective tool for greater R&D investment unless paired with a more
competitive business tax system.
• Providing an immediate and full deduction for R&D costs is neutral tax
treatment and helps incentivize firms to invest in R&D. However, under
current law, firms will be required to amortize R&D costs over five years
beginning in 2022, which would make the U.S. an outlier internationally and
reduce our international competitiveness in R&D.
• According to the Tax Foundation General Equilibrium Model, canceling R&D
amortization would raise long-term GDP by about 0.1 percent, raise wages by
nearly 0.1 percent, and create about 19,500 jobs.
Federal Policy Ana