By Kip Eideberg, AEM Senior Vice President of Government & Industry Relations —
Editor’s Note: This was originally published by Bloomberg Tax. It is being republished here with their permission.
While tariffs have dominated the conversation about restoring US competitiveness in manufacturing, an important step toward that goal lies hidden away in the federal tax code.
A provision in Section 174 making it more expensive to deduct research and development expenses from taxes, is antithetical to President Donald Trump’s pledge to revive the US manufacturing industry. Fortunately, a bipartisan group of legislators have introduced legislation to restore annual R&D expensing.
Sens. Maggie Hassan (D-N.H.) and Todd Young (R-Ind.) and Reps. John Larson (D-Conn.) and Ron Estes (R-Kan.) have introduced the American Innovation and Jobs Act in the Senate and the American Innovation and R&D Competitiveness Act in the House of Representatives. These bills will help US-based manufacturers better compete globally.
When it passed seven years ago with the Tax Cuts and Jobs Act, a deleterious Section 174 provision—a reversal of a 70-year-old policy that allows businesses to deduct R&D expenses every year—wasn’t intended to be permanent. But year over year, Congress failed to repeal this change. Businesses have faced the consequences since 2022.
Instead of deducting R&D expenses each year, businesses must amortize domestic R&D expenses over five years. According to the Tax Foundation, this provision of Section 174 essentially turns a 100% deduction into an 89% deduction because of inflation and opportunity cost. It’s basically a tax hike in a bill designed to lower the tax burden faced by businesses and families.
The impact is basic economics—reduced investment in R&D means less innovation. Less innovation means slower economic growth. Slower economic growth means fewer domestic jobs.
To make matters worse, at the same time as the US decreased incentives for R&D, other countries have stepped up. A year after this provision of Section 174 took effect, China expanded its R&D deduction from 175% to 200% for most businesses.
Why are R&D tax incentives important? In 1970, the American manufacturing industry made up 31% of private sector employment. Today, it makes up less than 11%.
Job numbers only tell part of the story. US manufacturers currently export nearly double the inflation-adjusted $1.5 trillion they contributed in 1970. In 2024, US manufacturers accounted for $2.3 trillion of total US GDP.
The real test of economic strength is an industry’s growing contributions to the US economy. And growth isn’t possible without significant innovation, underpinned by robust R&D spending.
Equipment manufacturers—which supported 2.3 million jobs and contributed $316 billion to the US economy as of 2023—want to embrace and develop new technology in the US, including AI, autonomy, and interoperability. But investing in R&D involves significant upfront expenses that are too high without the ability to deduct expenses annually, especially for smaller companies.
The resurgence of US manufacturing has strong support from the Trump administration, which has pledged to bring back blue-collar manufacturing jobs and restore the US to the “golden age” of manufacturing. To keep up this momentum, we should start by ensuring that the US tax code promotes growth and innovation.
Trump’s agenda of restoring the US manufacturing status requires a competitive tax code that encourages companies to invest in R&D. While fixing R&D expensing may not be the top priority for some in Washington, US equipment manufacturers are ready to play our part in unleashing America’s manufacturing prowess.
