By Omar S. Nashashibi, co-founder, The Franklin Partnership, LLC

These days, when there is reference to the Big 3 on Capitol Hill, it’s not about the Detroit OEMs. Instead, it’s about lobbying on the Big 3 tax provisions that are having an overwhelming impact on AMBA members: reinstating R&D expensing while eliminating capitalization and amortization requirements, restoring 100% Bonus Depreciation and including the full EBITDA standard for interest deductibility on business loans.

The Tax Cuts and Jobs Act signed by former President Trump in 2017 phased out or eliminated several key tax provisions used by AMBA members. Key among them is Section 174, which eliminates the ability to immediately expense a company’s R&D activities and requires manufacturers to capitalize their R&D and amortize those expenses over five years starting on Jan. 1, 2022. The change in law has caught many by surprise, leading AMBA to activate its membership and lobbying team to press lawmakers to reinstate full expensing and eliminate the capitalization and amortization requirements.

In a March 2023 survey, 77% of AMBA members reported conducting R&D activities in 2022, with the average dollar amount being $1.446 million for each company. Members report that the average increase in tax liability in 2022 for AMBA members due to having to pay tax on R&D as an asset and amortization of expenses is $290,013. AMBA’s message to lawmakers is that this is a direct tax on America’s small businesses; and will lead to the hiring of fewer manufacturers, decrease investments here in the US and increase China’s advantage over an industry critical for national and economic security.

This statement is borne out in the data from AMBA’s survey that is being sent to lawmakers on Capitol Hill. As a result of the requirement to capitalize and amortize R&D activities, 50% of AMBA members will reduce levels of R&D in 2023; 48% will have to reduce capital expenditures to pay the added tax liability; 25% will have to freeze hiring; 20% will have to borrow to pay the added tax liability; and roughly one in nine AMBA companies will have to lay off employees to pay the taxes due as a result of this law.

These are essential small businesses, averaging 56 employees as of April 1, 2023, according to the survey, placing an outsized impact of this tax hike on the shoulders of downstream manufacturers. This is why AMBA is lobbying Congress now. In the US House of Representatives, Reps. Ron Estes (R-KS) and John Larson (D-CT) introduced the American Innovation and R&D Competitiveness Act (H.R. 2673) and Senators Maggie Hassan (D-NH) and Todd Young (R-IN) put forward the American Innovation and Jobs Act (S. 866), both of which permanently would repeal the harmful R&D amortization provision and reinstate R&D expensing retroactive to Jan. 1, 2022.

Making things worse for American businesses are other provisions in the TCJA that will reduce investments. The 2017 law provided manufacturers with the ability to immediately expense 100% of their capital expenditures, known as Bonus Depreciation. However, in a cost-saving measure similar to the R&D 174 provision, the law reduced 100% full expensing to 80% effective Jan. 1, 2023. While not unexpected, the reduction in 2023 to 80% and then to 60% in 2024 and down to 40% in 2025, before falling to just 20% in 2026 before the full elimination of expensing in 2027, will have a significant impact on spending by manufacturers on heavy equipment and machinery.

Bonus depreciation at 80% in 2023 means manufacturers may purchase smaller machines, buy less equipment and bid on fewer potential orders. AMBA is pressing lawmakers to reinstate full 100% bonus depreciation for two years to align with the looming tax fiscal cliff coming at the end of 2025 when individual and passthrough business tax rates will increase under the TCJA. Senator James Lankford (R-OK) and Rep. Jodey Arrington (R-TX) recently introduced the Accelerate Long-Term Investment Growth Now (ALIGN) Act, which would restore full expensing for capital investments.

Another lesser-known provision in the TCJA also took effect on Jan. 1, 2023, this one eliminating the ability of companies to include Depreciation and Amortization when calculating their business loan interest deduction under Section 163(j). The law no longer allows companies to use the full EBITDA standard, which also impacts investment decisions by companies. The American Investment in Manufacturing (AIM) Act (H.R. 2788 in the House and S. 1232 in the Senate) is a bill supported by manufacturers that would reinstate the EBITDA standard for interest deductibility. The bill is led in the House by Reps. Adrian Smith (R-NE) and Joe Morelle (D-NY), and in the Senate by Sen. Shelly Moore Capito (R-WV) and Kyrsten Sinema (I-AZ).

These Big 3 tax provisions have varying levels of bipartisan support in Washington, D.C., and in the case of an R&D fix, overwhelming bipartisan support. The challenge is the same as always, Congress no longer regularly passes bills on its own. Rather, lawmakers bundle multiple pieces of legislation together on a must-pass vehicle, often a government spending bill or possibly this year, a debt ceiling package.

Lawmakers, in both parties, are assuring lobbyists that they will get an R&D fix done this calendar year but addressing both 100% expensing and business loan interest deduction face a tougher path. Regardless, the Big 3, or even one on its own, likely needs a broader measure to which lawmakers ultimately will attach at least the R&D provision.

These assurances from members of Congress are of no use to manufacturers who are facing six-figure tax bills this year because of inaction on Capitol Hill last year. Sources indicate that a key House committee may start moving a bill with these and other tax provisions included in May or June, but a final solution likely is several months away still. There is a possibility of including R&D and other provisions on a bill to increase the debt ceiling that Republicans and Democrats will start to negotiate this summer, but more concrete action may not be seen until closer to September 30, or even after Thanksgiving.

This is why the continued pressure from AMBA members and the lobbying team in Washington to retroactively reinstate the Big 3 tax provisions is more critical than ever.

Omar Nashashibi is a founding partner at The Franklin Partnership, LLC, a bipartisan government relations and lobbying firm retained by the American Mold Builders Association in Washington, D.C.