By Omar S. Nashashibi, co-founder, The Franklin Partnership, LLC
What Congress giveth, it can quickly take away. This is the lesson manufacturers are quickly learning. The other hard lesson learned is that the federal government plays an outsized role in a company’s operation – whether the owner likes it or not.
Research and Development
On August 1, 2024, the US Senate failed to secure the 60 votes needed to send President Biden bipartisan legislation to eliminate the requirement to pay taxes on research and development in effect since January 2022. Earlier this year, AMBA successfully lobbied the House of Representatives, which passed the legislation January 31, 2024, by a 357-70 vote.
Had the legislation cleared the Senate, manufacturers would no longer have to amortize their R&D activities over five years, nor capitalize those expenses retroactive to January 1, 2022. The bipartisan bill also restored 100% expensing for capital equipment starting January 1, 2023; the rate fell to 60% this past January and will drop further to 40% next year if Congress does not act.
This is the fundamental concern: Sometimes when government does not act, it can cost manufacturers more than when it does. The failure of the Senate to pass the tax bill this summer means an added six-figure tax liability not anticipated by businesses.
In a 2023 survey of AMBA members, 77% reported conducting R&D activities, with 50% reducing those activities due to the requirement to amortize and pay taxes on R&D. Members stated that they face on average $290,013 in additional tax liability due to the tax on R&D, leading 48% to reduce capital expenditures to pay the added tax liability.
This Congressional inaction harms US small businesses and the American economy. Lack of investment, slowing growth and falling behind China are all the realities now faced. Lawmakers on Capitol Hill are unlikely to make manufacturers whole in any legislation they may move in the lame duck session following this November’s election.
Sources in Washington indicate that if Congress was to move a bill in December, it likely would focus on allowing full expensing for R&D in 2024 and 2025, with the possibility of 100% expensing restored, but also only for those two years. This is increasingly emerging as the best-case scenario for action on taxes in 2024. The worst case is the status quo – manufacturers continuing to pay taxes on their R&D and bonus deprecation expensing falling to 40% on January 1, 2025.
AMBA members are advised to work closely with their CFOs, CPAs and financial advisors as they enter another tax filing season to act accordingly. While no business should make decisions based on political actions, or in this case inaction, taking a conservative approach to tax planning during these uncertain times likely is wise.
Tax Provisions
Lawmakers largely have moved on to focus on the fiscal cliff coming in January 2026, when $4.6 trillion worth of tax increases will take effect… if Congress does not act. This reoccurring theme of Congressional inaction costing manufacturers millions is slated to continue past the November election.
Under the Tax Cuts and Jobs Act (TCJA) passed in 2017, not only did the ability to expense R&D activities expire in January 2022, the 20% deduction for pass-through businesses will expire on January 1, 2026. If Congress does not act, taxes will increase on owners of AMBA member companies structured as an LLC, LLP, Subchapter S Corporation or other pass-through entity where the owner pays taxes at the individual rate. If Congress does not prevent the 2026 fiscal cliff by passing legislation next year, individual owners of pass-through businesses should expect a return to a top federal rate of 36.9%.
The exemption threshold for the estate tax, also known as the death tax, falls drastically, subjecting countless family-owned small businesses to additional taxes during generational transitions. A number of other tax provisions also expire if Congress does not intervene in the coming year, setting the stage for additional economic uncertainty in 2025, in addition to the unknown outcome of the November 2024 election.
Many Republicans in Washington, D.C. believe that following this election, they will control the White House, the House and Senate, giving them full control over policymaking in the nation’s capital. Party leaders currently are educating their members on what tax changes are possible were they to achieve this outcome.
Sources indicate that Republicans would try to move quickly in the Spring ahead of the debt ceiling showdown expected next summer and would not only extend the TCJA provisions, such as permitting R&D expensing, but also look beyond that law and likely seek to slow or reverse some of the Inflation Reduction Act climate tax incentives.
In the event of a divided government with shared control, a deal on taxes will take considerably longer as the sides are expected to negotiate well into 2025 and possibly not pass a bill until after the $4.6 trillion in tax increases take effect on January 1, 2026. Should Vice President Harris win the White House, her administration likely will seek an increase in the C-Corporation tax rate from the 21% secured under the TCJA in 2017. President Biden’s reelection campaign indicated he would seek a 28% C-Corp tax rate in a second term, with some in Washington speculating that a Harris administration could see a rate at least at that level and possibly over 30%.
Planning for the Future
Planning for these uncertainties should start now. The AMBA will continue to lobby throughout the remainder of this year on behalf of members to restore the R&D expensing, return bonus depreciation to 100% and provide some certainty on tax policy. This election clearly will determine whether tax rates increase in 2026, and on whom, and whether Washington will create policies to incentivize manufacturing in America.
Far too often, constituencies spend their efforts lobbying government to not take action. In the case of the looming tax increases, the cost of Congressional inaction was made quite clear as manufacturers pay more for investing in their plants, people and this country.
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.
