R&D and Taxes

Under U.S. tax law, firms get a tax credit for investment in R&D, an incentive to increase R&D investment. A paper finds that a one standard deviation in a “strategic” increase in R&D for tax purposes reduces the effective tax rate by 1.7%. The practice results in higher R&D in the income statement and lower operating profit, along with an increase in uncertain tax benefit liabilities under FASB 48.

See Laplante, Skaife, Swenson, and Wangerin, Journal of Accounting and Public Policy 38 (2019), 89-105.