The Steep Price of Curbing R&D Tax Deductibility

New research reveals the significant negative consequences of limiting the tax deductibility of research and development (R&D) expenditures. Since 2022, US companies have been required to capitalize and amortize R&D expenses rather than deducting them immediately. The study finds that affected US firms experienced an average increase in their cash effective tax rate of 11.9 percentage points (62%). This resulted in decreased R&D investment among domestic-only, research-intensive, and constrained firms. In aggregate, these estimates translate to a $12.2 billion reduction in R&D in the first year among the most research-intensive firms. Furthermore, affected companies also reduced capital expenditures and share repurchases, suggesting that firms reduced other types of investment and shareholder payouts to meet the increased cash tax liability. The paper provides policy-relevant evidence of the substantial real-world effects of limiting innovation tax incentives.