New Tax Law Could Hurt Small Businesses, Impacting Technology And Even National Security

A change in the U.S. tax code might make it harder for small businesses to write off research and development costs to get a tax break.

By offering tax deductions for R&D spending, the government incentivizes American innovation. But now, a tweak in the tax code makes it harder for businesses to deduct their R&D spending, which could lead to a downturn in innovation, according to Forbes.

TAX DAY: Starting this year, companies now have to amortize their R&D spending over a 5-year period to receive the full tax breaks. This means that eventually, companies will receive the same tax break on R&D costs, but will not have as much cash flow in the interim to keep spending on innovation. 

One might think that the giants of the tech and defense industries, like Alphabet Inc GOOG, Apple Inc AAPL and Lockheed Martin Corp LMT, are the ones most worried about R&D tax breaks, but according to the U.S. Small Business Administration, small businesses “spend a much higher percentage of their sales” on R&D than large corporations do.

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How Is It A National Security Issue? The Pentagon identifies technologies that it sees as pertinent to the security of the United States. While some development and innovation happen within the U.S. branches of the military, a lot occurs within the private sector as well. Among the technologies the Pentagon noted are 5G communications, microelectronics, and AI. 

If American companies working to develop these technologies suddenly have less cash to spend on R&D than they planned on having, innovation could be hampered. By slowing down the companies working in these crucial areas, it leaves the door open for other countries to catch up. For example, in China, companies can expense 200% of the money they spend on R&D.

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