WEST PALM BEACH, FL – One would think that in the aftermath of lockdown policies that have devastated the U.S. economy, the government would be doing everything possible to foster economic growth and generate jobs. Instead, the Internal Revenue Service (IRS) appears to be going out of its way to do the exact opposite.
The architectural, engineering and construction industries have for years now received research and development (R&D) tax credits, a just and deserved reward and incentive for those industries’ roles in fostering innovation and creating and maintaining the nation’s vital infrastructure.
In addition to playing a pivotal part in America’s infrastructure — and by extension its national security — the architectural, engineering and construction industries have the potential to generate thousands of jobs.
This makes the recent increase in denials of R&D credits by the IRS all the more inexplicable. But even more indefensible is the fact that the IRS’s denials are being unfairly applied — with companies in the architectural, engineering and construction community that fall into the small business category bearing the brunt of the denials.
In fairness, this terrible situation isn’t entirely the IRS’s fault. Although the IRS unit that audits large businesses has easy access to engineers equipped to analyze R&D tax credit submissions, the small business unit typically lacks access to the same level of resources.
But regardless of its causes, the recent unprecedented spike in denials of R&D credits to firms in the architectural, engineering and construction industries could have devastating consequences and should be a national scandal.
These industries generate high-paying jobs, and the R&D tax credits incentivize them to keep jobs in the U.S. rather than move operations to competitive overseas markets. The R&D tax credit is simply one of our nation’s best defenses of technological innovation and intellectual property.
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Because of these credits, for example, engineers and architects are able to play a vital role in technological R&D, helping the country develop climate-conscious construction and infrastructure advancements. This workforce also fuels economic growth as a whole, being largely composed of individuals making $100,000-$150,000.
The equal and consistent application of R&D credits for the businesses in the architectural, engineering and construction industries is crucial if we are to keep this workforce in the U.S. Driving away key strategic jobs in the six-figure wage range at a time when capital markets are stressed and the country’s economy is teetering on a COVID-constructed cliff, is not a wise thing for the government to be doing.
Last year my company, Engineered Tax Services, brought up this issue in meetings with members of the U.S. House Ways and Means and U.S. Senate Finance Committees, and they expressed concern that the IRS could inadvertently stifle technological innovation and economic growth at a time when America needs it most.
There is, however, a far more nefarious and damaging consequence should the IRS’s actions continue to go unchecked by Congress. By granting R&D credits to large megacorporations while denying them to firms in the small business sector, the government is unfairly favoring these giant corporations and effectively ensuring potential competitors cannot grow to challenge their market dominance.
This completely strangles the competition and innovation vital for a dynamic and expanding economy. The inevitable result of government playing favorites like this is veritable corporatocracy, where the free market is a distant memory and a miniscule number of mammoth corporations exert control over the entire economy.
At a time when massive megacorps appear to be working hand in hand with government interests to suppress free speech and political opposition, the last thing they need is more power.
Congress must act to rectify this situation, and the IRS must issue clarifying guidance in the form of a revenue ruling, so that small businesses in the architectural, engineering and construction community — so critical to our infrastructure, innovation, and national security — have a level playing field on which to compete.