The Consequences of Limiting the Tax Deductibility of R&D

60 Pages Posted: 21 Nov 2024 Date Written: July 23, 2024 Abstract We study the tax payment and innovation consequences of limiting the tax deductibility of research and development ("R&D") expenditures. Beginning in 2022, U.S. companies are required to capitalize and amortize R&D rather than immediately deduct these expenditures. We utilize variation in U.S. firms' fiscal year ends to test the effects of the R&D tax change in a difference-indifferences framework. We first document that affected U.S. firms' cash effective tax rates increase by 11.9 percentage points (62%), on average. We then test and find decreases in R&D investment among domestic-only, research-intensive, and constrained firms. In aggregate, these estimates translate to a reduction in R&D of $12.2 billion in the first year among the most research-intensive firms. Further, we observe decreased capital expenditures and share repurchases among affected companies, suggesting that firms also reduced other types of inves ... Read full article.