Thursday, November 30, 2023

North Carolina Secretary of Commerce Asks Congress for Deferment of the “Innovation Tax” Internal Revenue Code, Section 174 would require entrepreneurs to amortize research and experimentation expenditures

Raleigh, N.C.
Nov 30, 2023

Secretary Machelle Baker Sanders of the North Carolina Department of Commerce sent a letter to the North Carolina Congressional delegation on Monday calling for deferment of the Internal Revenue Code Section 174's amortization requirement concerning research and experimentation expenditures. Dubbed the “Innovation Tax,” Section 174 could dramatically reduce the ability of North Carolina entrepreneurs to develop novel products and processes that create new jobs.

Established in 1954, Internal Revenue Code, Section 174 was created to eliminate uncertainty in tax treatment of research and experimentation (R&E) expenditures, and to encourage R&E to drive innovation across the United States. Under a provision of the 2017 Tax Cuts and Jobs Act, costs associated with R&E activities must now be amortized over time at a rate of five years for R&E costs within the domestic border and fifteen years for R&E costs incurred overseas, meaning North Carolina-based (and domestic) businesses can no longer deduct these innovation-related expenses. The letter asks North Carolina’s Congressional Delegation to advocate for the deferment before the end of 2023.

“Innovation is an accelerator that creates new industries, keeps existing ones globally competitive, advances national security, and drives future economic growth and well-being.” said North Carolina Secretary of Commerce Machelle Baker Sanders in her letter to Congress. “This issue poses a significant threat to North Carolina’s most innovative businesses.”

The effects of the Innovation Tax are just beginning to take effect. The National Association of Manufacturers has estimated that 50,000 manufacturing jobs, many in large companies, may be lost due to Section 174. More immediately to North Carolina, where it is a national leader, the Innovation Tax is a devastating blow to companies receiving federal Small Business Innovation Research/Small Business Technology Transfer (SBIR/STTR) awards, which could owe taxes on up to 90 percent on their awards.

“North Carolina has a long, established, and growing track record in businesses with SBIR and STTR awards, and these businesses have never had to cover the tax on these awards or research expenditures until now,” explained Janet Cowell, the Chair of the North Carolina Board of Science, Technology & Innovation, which oversees the state’s SBIR/STTR incentive and matching programs. “The state funding provided from the One North Carolina Small Business Program, which compliments the companies receiving SBIR and STTR awards, alone cannot alleviate the negative impact that Section 174 will bring to North Carolina.”

Secretary Sanders, as well as a growing nationwide list of concerned appointed officials, policy advocates, chief executive officers, and companies, are strongly advocating for the deferment of Internal Revenue Code section 174's amortization requirement concerning R&E. Several efforts are underway by North Carolina and national groups to garner support for deferment. You can add your voice and cosign a letter to Congress here.

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