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Lankford: Tax policy must encourage business R&D, investment

By: US Senator James Lankford (R-OK)

Tax policy is as dry as the dirt in August, but it’s an essential part of planning any business expense. For decades, federal tax policy has changed every few years and left business owners and accountants struggling to determine how to prepare quarterly filings. This year is no different – with vigorous debates in Congress over the future of research and development, bonus depreciation, nonprofit deductions, pass-through businesses and countless other tax treatments.

Let me clarify a few.

Most of the tax code is set in law and doesn’t change from year to year without a specific vote in Congress. Tax policy that has a short time frame, like many energy incentives, must be renewed at the end of each year. In Washington, DC, those short-term tax policies are called “tax extenders.” Some tax policies “sunset” within 10 years, like many of the taxes in the 2017 Tax Cut and Jobs Act. The expiring, less-than-10-year taxes are the most difficult to plan for, but they are often exceptionally important to economic growth.

Over the last few months, I have connected with Oklahoma businesses – large and small – to talk about areas of tax policy that affect them and how we can ensure our tax policy provides certainty for businesses.

The 2017 Tax Cut and Jobs Act allowed businesses to either fully deduct research and development investments in the current tax year or claim them as a tax credit. But starting in 2022, businesses were required to amortize their R&D expenses over five years for domestic R&D and 15 years for foreign R&D, rather than deducting them in the year they occurred.

When businesses can deduct their expenses immediately, they’re incentivized to do more research, invest in more capital equipment and hire more people, which grows our economy, provides more jobs, and impacts our global competition. Right now, China has supersized its R&D deduction while the US is shrinking our deduction. We should reverse our declining R&D deduction and permanently encourage businesses of all sizes to remain innovative in America.

For the past 20 years, under Republican and Democratic administrations, bonus depreciation has been an essential element of good business tax policy. Bonus depreciation acknowledges that business expenses are not business profits, so they should not be taxed as profits. The 2017 tax bill expanded on that nonpartisan tax policy by allowing businesses to depreciate 100% of their capital and equipment during the purchase year, instead of over years and years of tax returns.

That change doesn’t alter how much tax a business can deduct; it simply changes when they can deduct it. With 100% depreciation, a business can deduct its tax in a single year, instead of over several years. That allows a business to invest more capital, hire new employees faster and expand their business.

But bonus depreciation began to phase out at the end of 2022 and will continue to decline until it expires, which will hurt our business growth even more.

My ALIGN Act will make bonus depreciation a permanent and predictable tax policy for our businesses and manufacturers and encourage economic growth for decades to come. It’s one of multiple tax bills I have introduced to keep America growing and competitive in our national and international business competition.

Tax policy may not be exciting to discuss, but if you want to grow a business, get a job or increase innovation, it’s essential.