Fixing the R&D Tax Code Blunder Isn’t a Victory, It’s a Reset

Congress has finally reversed the damage to research and development investment caused by the Tax Cuts and Jobs Act’s Section 174 amortization requirement. But the One Big Beautiful Bill Act should be seen as a floor, not a finish line. If the US wants to compete globally, it needs more resilient and forward-looking R&D tax frameworks.

For businesses on the cutting edge of innovation, the lost years were expensive, disruptive, and entirely unnecessary. Restoring immediate expensing is a backward-looking repair, not a strategy for the future. While the US was busy dithering over whether to correct its own tax policy mistakes, other countries were building out systems that reward research, development, and commercialization.

The first task before Congress is to ensure stability. The Section 174 saga, which began with the Tax Cuts and Jobs Act in 2017 and continued through its implementation in 2022, signaled a change in how the US handles tax incentives for innovation.

From 1954 to 2017, there was relative stability. After that, such incentives were treated as temporary, negotiable, and expendable—subject to repeal, sunset, and sudden reversal.

Innovation doesn’t thrive under continuing resolutions and stopgap measures, especially in fields where investments can take decades to reap returns. R&D investment looks to long timelines, steady capital, and policy signals that ensure there isn’t a seismic shift every election cycle.

With the passage of the Trump administration’s massive tax bill, Congress has written immediate expensing back into permanent law. But permanence on paper isn’t permanence in practice.

Businesses may not be reassured by a statute alone. Congress needs to treat R&D expensing like core infrastructure, with no ambiguity. Many tax thresholds, standard deductions, and credits are indexed to the Consumer Price Index, which shows Congress already believes core tax benefits should adapt to economic conditions.

Thus, the next step is to embed automatic economic responsiveness into the code for R&D expensing. For instance, if gross domestic product growth falls below 1.5% for two consecutive quarters, or if domestic R&D spending slides as a share of GDP beneath its five-year average, the deduction could expand. Allowing for 120% expensing of eligible costs would create targeted counter-cyclical stabilizers, designed to support innovation when private capital pulls back.

A distributed electric drive unit on display at the Contemporary Amperex Technology Co. research and development facility in Shanghai.

Photographer: Qilai Shen/Bloomberg via Getty Images

Such a policy is overdue—China implemented 120% expensing for investments into integrated circuits and industrial machines in 2023 in response to flagging GDP. In the years since the TCJA, other countries have scaled up super-deductions and accelerated credits to capitalize on the US’ retreat from R&D. A modern tax system should anticipate the conditions under which investment is most at risk and would act as an economic shock absorber.

Still, we must grapple with how we want to balance rewards for efforts versus those for outcomes. Under existing policy, companies can receive generous tax benefits for spending on research even in situations where that research never leaves the lab, generates revenue, or creates a single job.

That observation isn’t to suggest science for science’s sake is unworthy of the investment of public funds. But linking innovation incentives to economic impact requires further rewarding companies that bring ideas to market.

Immediate expensing should remain the baseline and bare minimum. Firms that hit rigidly defined commercialization milestones, however—such as securing intellectual property protections, licensing R&D products, or manufacturing underlying IP domestically—could be allowed to unlock enhanced deductions, additional credits, or other tax advantages.

This would align the tax code with the full lifecycle of innovation, from raw concept to commercialization. It also would reflect the broader shift that occurred globally while the US was sorting out whether R&D expenses needed to be amortized over five years, as countries such as Singapore and China structured incentives to prioritize bringing products to market.

The repeal of Section 174 amortization, though welcome, stands as an indictment of how innovation policy can be handled in Washington. Congress left a policy misstep in place for three years, undermining investment and weakening sectors both parties claim to champion.

Now the damage isn’t really being undone—the immediate bleeding has just stopped. The question is whether we’ve convinced the market it won’t happen again.

An R&D framework in 2025 shouldn’t be reactive, political, fragile, or negotiable. It should be built around the principles of permanence and responsiveness with an emphasis on results. To prevent a future tax policy about-face, Congress should signal Section 174 permanence by taking real steps to index expensing to the economy and requiring full economic scoring for any future attempt at repeal.

Congress can’t constitutionally bind future lawmakers. But it can absolutely require that any repeal attempt be subject to scoring by the Joint Committee on Taxation or the Congressional Budget Office—making the cost of a reverse course visible and potentially politically onerous.

The Section 174 reversal shouldn’t be mistaken for a policy victory—it’s more like calling the fire department after setting the blaze and seeing the structure partially consumed. If we want R&D treated like economic infrastructure, then the tax code should reflect that with real legislative durability.

Andrew Leahey is a tax and technology attorney, principal at Hunter Creek Consulting, and practice professor at Drexel Kline School of Law. Follow him on Mastodon at @andrew@esq.social

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