Some of the largest defense contractors say they're seeking to work with Congress to change or reverse a portion of the 2017 tax legislation that would, effective in 2022, require companies to delay writing off research and development costs.
Companies today can immediately deduct research and development expenditures, according to a recent letter from the R&D Coalition to Capitol Hill.
"However, at the end of 2021, businesses will be required to amortize these expenditures over a period of years, making the U.S. the only developed country with such a policy," according to the letter. "If this policy were to go into effect, it will act as a disincentive to perform R&D in the U.S. and as a result hurt U.S. R&D jobs and innovation at a time when we need to encourage these types of investments."
The R&D Coalition contends the tax change would also "compound the negative impact from the [coronavirus] crisis on U.S. employment, liquidity, and ultimately innovation."
The group is calling on Congress to include in a stimulus package a bill introduced last year that would overturn the tax provision. The bill, introduced by Reps. Ron Estes (R-KS) and John Larson (D-CT), would allow immediate expensing to continue.
Speaking at a conference earlier this month, Ken Possenriede, Lockheed's chief financial officer, said the contractor is watching this issue.
"We're working with our government affairs organization to talk to the right constituents in Congress, the tax authorities . . . to talk about [how] this would be harmful to industry," he said. "This certainly would be harmful for Lockheed Martin."
"It effectively, for the first year, would take our cash from operations down $2 billion, $1.6 billion year after that, $1.2 billion et cetera, et cetera, until it evened itself out," he added.
Speaking at the same conference, Toby O'Brien, the CFO at Raytheon Technologies, said his company is also concerned.
"I would tell you we're supportive of efforts that are ongoing to reassess and potentially reverse this and the reason being we do believe the immediate expensing is a feature that's important to the tax system in order to help drive that U.S.-based research activity and innovation," he said.
"From a [Raytheon Technologies] point of view -- all else equal -- out in 2022, our estimate is it could be about a $2 billion impact to cash taxes with the delayed deduction and having to amortize over five years," he said. "And then obviously that impact would reduce each year after that and ultimately after five years, you'd kind of be back to where you started from."
Still, Possenriede said he's not optimistic Congress will act quickly.
"We don't think anyone's really seriously going to address this until a) COVID's over, and b) there is an election and either . . . an incoming president or a new administration," he said.