The R&D Landscape is Changing for Manufacturers

Research and Development (R&D) is an integral part of any company’s growth and momentum. It supports innovation and the ability to maintain a competitive edge in markets that are constantly tasked with producing the next best thing.

In manufacturing, failure to invest in R&D often means stagnancy and, eventually, loss of market share to a competitor. It’s why so many producers hold R&D efforts in high esteem, and why they’re outraged at changes to the R&D tax credit (26 U.S. Code §41) that took effect in 2022.

2022 marks big changes to the R&D tax credit

Last year was a challenging one for manufacturers across the country. From snarled supply chains to fears of a looming economic recession, producers have had to adapt and adjust to several unfavorable conditions. One of the most concerning changes is the overhaul the federal government made to the R&D tax credit.

Manufacturers rely on R&D investments to develop specific product designs and innovative processes that meet the ever-changing demands of customers. Thus, it’s a significant part of their year-over-year budget and spend, and has ramifications that eventually trickle down to the bottom line in the form of new revenue. That revenue might not manifest for years, which makes tax credits an important buffer.

Until the start of 2022, manufacturers and many other businesses could deduct the entirety of their R&D expenses in the same year they were incurred. Now, businesses must spread those deductions over a five-year period. For those engaged in heavy R&D spending, it’s a dramatic change — one that’s certain to impact their tax burden not only this year, but for years to come.

Changes to the R&D tax credit hurts manufacturers

With these changes to the R&D tax credit, manufacturers find themselves in a precarious situation. They’re bearing more of the burden of innovation upfront for advances that might not pay for themselves in the near-term. It’s causing them to reevaluate where they spend their dollars, and it’s a move that will impact how much companies can invest in future technological and sustainable improvements.

Or, as many manufacturers claim, the new standard penalizes investments in innovation.

Not only do the changes to the R&D tax credit present challenges in terms of investment in innovation, they’re also set to become a burden in other ways. The tax change will eat into profits and have a negative impact on cash flow — one that could spill over to every part of a business, including employee pay and benefits.

R&D investment is critically important for manufacturers

In terms of dollars and cents, changes to the R&D tax credit hit manufacturers harder than any other economic sector. Forcing manufacturers to amortize their R&D costs over a five-year period — rather than deduct them immediately — disproportionately penalizes the manufacturing sector. Producers are set to spend $31.7 billion more in taxes in 2023, even as lawmakers claim to prioritize R&D developments.

Without a reversal or modification to the R&D tax credit, it’s likely more manufacturers will pull back on their reinvestments. It’s a move that’ll surely jeopardize the cutting-edge industries America needs for long-term economic stability and growth.