CFOs still pushing to reverse tax provision

The research and development tax, or R&D tax, was revamped and took effect at the beginning of 2022, and CFOs are still fighting to get the change reversed. But others say many finance chiefs are working to save face in front of investors due to their own poor planning.

If we take the timeline back to January 2022, businesses—which used to deduct their R&D expenditures from taxes in the year of usage—had to turn to amortizing the tax credit over a five-year period. It was part of the Tax Cuts and Jobs Act, which also cut the corporate income tax rate from 35%–21%. Over the course of the last year, finance chiefs have fought hard to reverse the provision, even penning a letter to Congress. Intel, the technology company that was the organizing chair of the November R&D coalition letter to Congress, followed up with an additional letter to Treasury Secretary Janet Yellen, sent on February 17.

As recently as Feb. 15, the Information Technology & Innovation Foundation (ITIF), a think tank based in Washington supported by many large companies, released new research that pointed to jobs as a key incentive to reverse the tax change. The foundation reported that an estimated 81,000 direct jobs would be created by reversing the change, and a further 188,000 jobs could be created if Congress doubled the rate.

Coincidentally, many of the very concerns about the change that have been discussed in Congress, such as doubling the rate, are highlighted in the study. Some are looking to attach the reversal, which didn’t go through in 2022, to the 1099-K tax income issue, which is gaining momentum, according to CNBC.

“Last year, that [R&D tax] cost us $1.6 billion in free cash flow. We had about $5 billion of free cash flow last year, so it was almost 50% of our free cash flow,” Neil Mitchill, CFO of Raytheon Technologies, told CFO Brew. “And this year, it’ll have a $1.4 billion impact on us.” Mitchill said he feels strongly about the need to repeal the provision, claiming it will put US companies at a competitive disadvantage.

Mitchill isn’t the only CFO worrying about the R&D tax change; there have been concerns that life-sciences companies will also be facing hits, and Intel has written blog posts urging for reform. And more than 400 companies have joined a coalition fighting to reverse the change.

But from another point of view, CFOs just got used to the instant deduction, instead of incorporating longer lead times into their credit paybacks, despite knowing the R&D provision was coming. The provision, was passed in 2017, giving the finance chiefs approximately five years before it was enacted.

Finance chiefs, who often are the first to speak to investors, have had to find a way to explain the sudden appearance of losses on the balance sheet.

“There was a little bit of a sugar rush when it was put in place where you got a lot of benefit early on,” Ken Bedingfield, current CEO of drone-development company Epirius and former public company CFO, told CFO Brew. “So the more mature companies are seeing a cash flow impact of, ‘I had this sugar rush, and now, unfortunately, it’s going away.’ Some did a better job of projecting and communicating about that than others.”

Mitchill acknowledged that over time, companies will get the deduction for the research. And Raytheon’s lobbying budget remains intact—Mitchill said that the company remains focused on meeting folks in Washington to overturn the provision.

“It’s just something I think, quite frankly, industry could have communicated better with investors on,” Bedingfield said.—KT