Small businesses in industries such as software and manufacturing are in a state of alarm due to the imminent expiration of a crucial tax deduction. They express concerns that failure to address this issue promptly could result in widespread layoffs and closures unless Congress takes swift action to amend the legislation.
Michelle Hansen, the co-founder of Geocodio, a geocoding company, emphasized the critical nature of the situation for small software firms. The tax modification at the center of this debate was enacted in 2017 during the tenure of former President Donald Trump. It was part of a comprehensive tax overhaul that reduced the top corporate tax rate from 35% to 21%.
To comply with Senate budget regulations and secure passage with solely Republican support, the legislation needed to avoid increasing the federal budget deficit over a ten-year period. Consequently, a provision was included that significantly reduced the amount of research-and-development expenditures that businesses could deduct from their annual revenue when calculating taxable income starting in 2022.
The impact of this change is particularly felt in industries like software, information technology, manufacturing, and pharmaceuticals. Engineering salaries, often classified as research and development expenses in sectors such as software and manufacturing, are now penalized under the revised tax rules.
Jeff Hibbard, the CEO of IntervalZero, a Massachusetts-based company specializing in software for precision machinery like semiconductor manufacturers, shared his company’s challenges. Despite generating approximately \(9 million in annual revenue with \)8 million in expenses, the deduction limitation on engineer salaries has forced him to dip into company savings to avoid laying off staff.
The House of Representatives voted overwhelmingly (357-70) to reinstate full expensing for research and development as part of a comprehensive $79 billion tax package. This bill, which includes provisions to enhance the child tax credit and extend other business tax benefits, is now awaiting consideration in the Senate. However, the bill’s fate remains uncertain due to ongoing debates on immigration, national security, and potential election-year politics.
Business owners like Benjamin Bengfort, CEO of Rotational Labs, an Iowa-based software company, are feeling the immediate impact of the tax changes. Bengfort had to downsize his workforce after facing a substantial increase in his 2022 tax bill. The altered law has not only affected his operational costs but also diminished demand for his products as his services are considered research and development expenses for his clients.
The uncertainty surrounding the bill’s progression in the Senate, coupled with political considerations and potential delays, is adding to the anxiety of business owners who are grappling with the financial implications of the tax deduction expiration.