If AEC firms cannot have certainty in how they operate and grow, it will be difficult to stay competitive.
Congress’ failure to fix Section 174 amortization requirements, along with the impending expiration of the 2017 tax laws such as the Section 199A deduction, make it very difficult for architectural and engineering firms to plan for the future.
Profitable companies will not be able to pursue growth opportunities, and some smaller innovative firms will be put out of business because of the inability to deduct wages and other expenses in the year they occurred, thus creating false paper profits. This results in an estimated 30 percent loss for every dollar of revenue that falls under Section 174. Losses of this magnitude are not sustainable for small, innovative firms. The unfair tax policy is on the verge of putting many firms out of business and the U.S. Senate must take action.
Hopes were high for the AEC industry following the Wyden Smith tax agreement. The Tax Relief for American Families and Workers Act (HR 7024) passed the House with overwhelming support in January of this year. HR 7024 would resolve the Section 174 issue for more than 22,000 small innovative businesses by allowing companies to deduct R&D expenses in the year they are paid. Unfortunately, the Senate has failed to bring this up for a vote to date.
The dysfunction that we see in our country today, even in the most basic functions of government, is unacceptable. Both parties of Congress agree that the Section 174 amortization needs to be fixed. But sadly, politics are winning out against the best interests of America’s innovative businesses. It appears that some in the Senate are willing to sacrifice small, innovative businesses by using this issue as a bargaining chip for non-related issues, or through the pursuit of future personal leadership roles.
Not all firms are impacted by these issues equally since entity type and/or ESOP ownership can skew the overall impacts. However, that does not mean the threat to innovation in the U.S. will not affect all firms.
The U.S. software industry will be devastated unless the requirement to amortize Section 174 expenses is overturned. Each and every day, our industry requires the use of software, and the development of new software has dramatically improved the industry over the years. If unfair tax policy kills our software industry, the resulting impact will be broadly felt throughout this nation’s economy.
If Americans are to remain globally competitive in technology, we need to have tax policies that are beneficial in supporting innovative and creative firms. It is unfathomable that we would have a tax policy for R&D expenses that hinders innovation by penalizing how companies can deduct these expenses. What we have now is not only unfair, but out of step with American values, putting profitable firms out of business solely because of a bad tax policy. It is made even worse by the fact that our politicians agree that it needs to be fixed, but then sit on their hands and fail to act.
ACEC, AIA, and many other business organizations are making their voices heard in Washington, D.C. It is critical to keep up the pressure in the Senate to fix the Section 174 amortization. Our future is at stake.
In addition to the challenges of the Section 174 amortization, we will soon face the expiration of the 2017 tax policy that benefits AEC firms. This means that firms, particularly pass-through entities which already pay higher taxes from the Section 174 amortization requirements, will be hit even further by higher rates on their phantom profits.
It is critical for owners and management within our industry to stay informed of potential legislation that supports our professionals, and reach out to elected officials to stress the importance of providing certainty in our industry.
If the AEC community works together across industries and states, legislative success is achievable. Recently in Oregon, coordinated industries were able to pass a bill that removed the duty to defend language in public contracts that provides protection for AEC firms. This was a coordinated effort between ACEC, AIA, and professional surveyor organizations.
Our industry is a trusted one, and we are fully committed to the improvement of society in everything we do. But if AEC firms cannot have certainty in how they operate and grow, it will remain difficult to stay competitive. Small and medium size firms are the backbone of our industry, and it would be a huge loss to see the industry crushed with unfair taxes.
Stay involved, keep up the communication, and let your U.S. representatives and senators know that we need better and more stable tax policy for all innovative firms in our great nation.
Dan Houf, P.E. is senior principal and president at Harper Houf Peterson Righellis, Inc., an Oregon-owned firm that has been recognized locally and nationally as a top engineering and multidiscipline firm. Contact him at dan@hhpr.com.
