My View: R&D tax change boosts Arizona innovation, economic growth

There is no disputing that research and development make the world go round in technology. And when there is a return on the time and energy spent before bringing the creation to market, it’s a win for all involved.

In Arizona, there also has been a trickle down for all of us since the contributions from tech have become so vital for the state’s economy.

But when the federal tax code changed in 2022 to do away with immediate expensing for R&D investments, I wasn’t alone in wondering whether we would be putting the brakes on incentives for creativity – and the rewards we share.

Fortunately, Capitol Hill and the White House undid the damage before it was too late.

The “One Big Beautiful Bill” signed into law by President Donald Trump on July 4 restores full and permanent expensing for R&D investments under Section 174 of the U.S. tax code in addition to making many of the temporary provisions of the 2017 Tax Cuts and Jobs Act permanent, as well as enacting other administration and congressional tax policy priorities.

Key to the change on R&D investments was dropping the unbelievable requirement enacted in 2022 that expenses needed to be amortized over five years, not in the year they were incurred as originally approved.

It’s little surprise to most people that taxes are based on net income. The original language and revision align with basic accounting principles: revenue minus expenses equals net income. Forcing companies to amortize – only deducting one-fifth of R&D costs each year—meant their taxable income appeared artificially higher. And so did their tax bills.

In turn, startups and small businesses faced huge cash flow burdens by being taxed on “phantom profits” they never actually saw. For companies not generating enough revenue to help absorb the extra costs, the options were grim: scaling back innovation, layoffs or turning the lights out altogether.

R&D changes provide long-term clarity

Besides reversing the damaging amortization requirement, another plus of the new law is providing retroactive relief for companies with annual receipts totaling no more than $31 million by reclaiming previously incurred R&D expenses. Cha-ching. Time for refunds!

I’m not alone in celebrating this good news from Washington. As part of the industry group Technology Councils of North America (TECNA), the Council strongly advocated the R&D expensing provisions. Being a member of TECNA’s Public Policy Committee, I was among those who worked closely with congressional leaders and the administration over the past three years to make this outcome possible. Restoring full expensing also was a priority discussed with the Arizona delegation during our annual DC Fly-In in April.

These provisions are essential to the vitality of our innovation economy and will provide both long-term certainty and immediate relief to small and mid-sized technology businesses that have been disproportionately impacted by the amortization requirement.

Restoring full R&D expensing, especially on a permanent basis, reinforces the United States’ commitment to global competitiveness, job creation and high-value economic growth. It’s not just a tax policy fix. It’s a lifeline for American innovation.

Steve Zylstra is president and CEO of the Arizona Technology Council.