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As the head of the American Council of Engineering Companies of Arizona, I represent the collective voice of a sector integral to our state’s growth and development. Arizona’s engineers and engineering companies are not just problem-solvers, but also creators, thinkers and inventors.
Yet, the current tax code – specifically a 2022 change requiring firms to amortize research and development expenses over five years – undermines the very innovation Arizona has worked so hard to foster.
Since 1954, engineering companies have been able to deduct R&D investments during the same year in which they were incurred. This has given small firms the financial flexibility needed to invest in innovation, deploy new technologies and hire employees in Arizona and across the country. But, due to a change in the law, engineering firms now face an increased tax obligation that is oftentimes double or triple what it used to be.
I’ve seen the impacts of this tax change first-hand, and cannot stress enough that this mandate will soon become an insurmountable obstacle for Arizona’s small to midsized engineering and design businesses. At a time when they should be hiring, training and innovating, they will instead be ensnared in a financial quagmire thanks to this amortization problem.
It’s important to understand that this isn’t just about numbers on a ledger. It’s about the engineering sector’s ability to make our roads safer, water and air cleaner, and our communities better. Engineering firms play a pivotal role in supporting Arizona’s growth and development by pioneering sustainable water management, constructing eco-friendly infrastructure and more.
Yet, this R&D amortization mandate endangers these critical missions and puts community infrastructure and advancement in jeopardy. For individual firms, the regulation is a penalty on progress that discourages companies from taking that “next step” forward.
We urgently need solutions now. Fortunately, there is bipartisan legislation – S. 866 and H.R. 2673 – supported by multiple members of Arizona’s federal delegation, including U.S. Sens. Kyrsten Sinema and Mark Kelly, and Reps. Andy Biggs, Juan Ciscomani, Ruben Gallego, Debbie Lesko, David Schweikert and Greg Stanton. These measures will restore the former R&D deductibility standard, helping safeguard an engineering sector so vital to our nation’s innovation and progress.
Quick action is required. I urge Arizona’s federal representatives to hear the plea of small businesses and fix the R&D amortization mandate before the end of 2023.
By showing unified support for immediate reform, we can ensure Arizona’s engineering and design firms continue to drive innovation in our communities and beyond for generations to come.
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This piece orginially appeared in the Phoenix Business Journal on December 8, 2023. Justan Rice is president of the Arizona chapter of the American Council of Engineering Companies.