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Defense and Aerospace Leaders Request to Delay R&D Tax Changes in Microelectronics Bill

Leaders in the defense, industrial, and aerospace industries are asking the government to delay an upcoming change to R&D taxes, which they worry would suppress innovation, manufacturing, and investment in microelectronics. In 2017, a new tax law was passed requiring companies to deduct research and development costs over a five-year period instead of having the option to make an immediate deduction if preferred — reducing flexibility for companies.

The initiative to reverse this policy move was headed by the Aerospace Industries Association, and 19 other leaders have expressed their support, including executives from Raytheon Technologies, L3Harris Technologies, and Northrop Grumman. Their letter was sent to the House and Senate on June 30, and it highlighted the importance of R&D tax credits in ensuring the US and its companies are competitive against the rest of the world — particularly China. Considering China goes to extreme lengths to maintain its competitiveness and encourage R&D, leaders believe that the US needs to take a similar approach.

It also mentions the need for financial support for chips research, which haven’t received funding since they were first launched as part of the National Defense Authorization Act in 2021. Considering that microelectronics production is currently centered in Asia and the Pacific and we’re facing various semiconductor supply issues, it’s essential to bring production onshore. Deputy Defense Secretary Kathleen Hicks has expressed support for the move.

Technological innovation is key for economic growth, and research is a key part of helping businesses to innovate, so the upcoming tax changes could hurt the US economy and put it behind the rest of the world in various sectors (including defense and aerospace).

Lawmakers have previously expressed willingness to delay or reverse the bill, and there have even been bipartisan efforts to pass a bill to reverse the companies. For instance, Senators Maggie Hassan and Todd Young have proposed making R&D investments available as immediate expenses. Many companies have also spoken about the negative effect the tax changes would have and the need to reverse them.

The letter regarding the microelectronics bill achieved an impressive 90-5 vote and bipartisan and bicameral support, showing that many leaders recognize the importance of keeping America’s defense sector on the cutting-edge of innovation.

It asked for inclusion in an existing competitiveness bill, which the Senate passed in June 2021. The House then approved its own version in February and signed it off the next month ready for negotiations. This new version included “Creating Helpful Incentives to Produce Semiconductors America Fund,” which focused on microelectronics and proposed $52 billion of spending between 2022 and 2026.