- Impending catastrophe for small businesses
- Request for urgent congressional action
- Potential for mass layoffs and closures
Introduction: A Life-and-Death Scenario
Small businesses in sectors such as software and manufacturing are facing a dire situation due to the expiration of a crucial tax deduction. Without immediate action from Congress, these businesses warn of the potential for mass layoffs and even closures. Industry leaders are sounding the alarm, emphasizing the urgency of amending the law to prevent disastrous consequences.
Background: The Tax Change
In 2017, then-President Donald Trump signed a tax-code overhaul that included a provision significantly reducing the deduction for research-and-development (R&D) spending. The change was necessary to comply with Senate budget rules and pass the law with only Republican votes. However, this alteration has disproportionately impacted industries like software, information technology, manufacturing, and pharmaceuticals.
Impact on Small Software Companies
Software executives, like Michelle Hansen, co-founder of Geocodio, stress that this tax change is a life-and-death scenario for small software companies. The reduction in the deductibility of R&D expenses has put immense financial strain on businesses. Jeff Hibbard, CEO of IntervalZero, a Massachusetts-based software design company, shares that he has been tapping into company savings to avoid laying off engineers. The inability to fully deduct engineer salaries has left companies with mounting tax bills, eroding profits and hindering growth. As a result, businesses are being forced to implement hiring freezes and postpone crucial projects, jeopardizing their competitiveness in rapidly evolving industries.
Efforts to Restore the Deduction
Last week, the House of Representatives voted overwhelmingly in favor of a $79 billion tax package that would restore full expensing for R&D. The bill also includes provisions to boost the child tax credit and extend other business tax breaks. However, the bill’s fate now lies in the hands of the Senate, which is currently preoccupied with debates on immigration and national security. Analysts express skepticism about the bill’s chances of passing, citing election-year politics and partisan obstacles.
Uncertainty and Potential Consequences
The uncertainty surrounding the fate of the tax package adds to the anxiety of small business owners. The expiration of the critical tax deduction has already led to layoffs and reduced demand for products and services. Benjamin Bengfort, co-founder and CEO of Rotational Labs, a software firm based in Iowa, had to lay off workers after his tax bill skyrocketed by 438% in 2022. These businesses are now facing an existential threat, struggling to navigate between limited resources and mounting tax liabilities.
The expiration of a critical tax deduction has thrust small businesses in sectors like software and manufacturing into a state of panic. Urgent action from Congress is needed to amend the law and prevent mass layoffs and closures. The House of Representatives has shown support for a tax package that would restore the deduction, but its fate remains uncertain in the Senate. The future of these businesses hangs in the balance, with time running out for a resolution.