As CEO of DJ&A Engineering, I’m often awestruck by the sight of the Sierra Nevada beyond our office in Reno. Being a civil and environmental engineering firm, we work on national parks, highways and some of the most rewarding and critical projects in the Silver State, and we have an inherent mandate to incorporate environmental stewardship into our operations. Part of that includes hefty investments in research and development (R&D) of new technologies and innovations that make our operations safer, more efficient and more cost-effective.
But alongside thousands of other small engineering and design firms, our R&D investments, not to mention our business operations in general, are at risk thanks to a change in the federal tax code that has yet to be rectified by Congress. While R&D can be a resource-intensive process with no guaranteed outcome, the potential benefits are enormous — not just for our firm but for society as a whole.
In 2022, a significant shift in how R&D investments are taxed fundamentally changed how companies can write off these costs. Unlike before, when firms could deduct R&D expenses in the same year they occurred, they must now spread these costs over a five-year period, placing a larger financial burden on companies each year. This change has had devastating impacts on small firms like ours, putting us into a position where, as a pass-through entity, in 2022 our individual effective tax rates were as high as 130%, prompting us to ask the question: “Why innovate if the penalty is so high?”
With over 75% of engineering companies belonging to the American Council of Engineering Companies being small businesses, we know we are not alone in our concerns over this increasingly worrisome tax provision. By extending the timeline over which R&D costs can be recovered, the new rule effectively increases the short-term financial burden of innovation, disincentivizing progress and investment.
That spells bad news for America’s communities and economy. At a time when the engineering field is needed more than ever to support the reinvestment and revitalization of vital public infrastructure, this amortization requirement unduly burdens small firms with an outlandish tax obligation that threatens their very existence. Studies estimate that this fault in the tax code will effectively reduce R&D spending in the U.S. by $4.1 billion annually, resulting in a loss of 23,400 direct R&D jobs in each of the first five years of enactment.
But this can be fixed if Congress takes action now. If they don’t, all of their legislative efforts and policy prioritizing infrastructure development will be moot as most smaller engineering firms will not be able to sustain operating costs.
With two bills under consideration in both the House and Senate, I urge Congressional leaders to join Senators Rosen and Cortez Masto and Representatives Lee and Titus in supporting a repeal of this change. Doing so means offering a true lifeline to the engineering companies — and other small businesses — that help construct and maintain the backbone of Nevada’s communities.
This piece orginially appeared on November 20, 2023 in the Reno Gazette Journal. Chris Anderson is CEO of DJ&A Engineering, headquartered in Missoula, Montana, with offices throughout the Western U.S., including Reno.