R&D Whiplash: Washington Accelerates, Harrisburg Slams the Brakes
For the many manufacturers who invest in research and development, Washington and Harrisburg are once again sending mixed signals, causing confusion, frustration, and threatening expansion in our commonwealth.
At the federal level, Congress recently restored immediate expensing for domestic research and experimental costs under the One Big Beautiful Bill Act (OB3). This change reversed the post-2021 requirement to amortize R&D over several years and was widely welcomed by manufacturers as a long-overdue fix for tax competitiveness. Immediate expensing improves cash flow, reduces the after-tax cost of innovation, and makes it easier for companies to greenlight new product development, process improvements, and expansion projects.
Pennsylvania, however, has chosen not to follow the federal lead. Moreover, our commonwealth will be an outlier amongst competitor states with only Rhode Island and Michigan adopting rules and R&D expensing treatment similar to Pennsylvania. Other states like Tennessee, Georgia, and even New Jersey have passed legislation in the past five years to allow for full expensing even when the federal government did not.
Because the commonwealth generally conforms to the federal tax code on a rolling basis for Corporate Net Income Tax purposes, the new federal R&D expensing rules would have automatically flowed into Pennsylvania law. That did not sit well with budget writers looking for revenue to fund Governor Shapiro’s spending spree. As a result, lawmakers moved quickly to pass Act 45 of 2025, which explicitly decouples Pennsylvania from the federal R&D expensing changes and preserves the state’s existing, more gradual schedule for deducting R&D expenses.
Put simply, manufacturers now get immediate expensing at the federal level but must continue spreading those same costs out over time for Pennsylvania tax purposes, reducing the benefit and increasing the cost of tax compliance.
The driving force behind the decision was not subtle. According to the Independent Fiscal Office, allowing immediate R&D expensing at the state level would have reduced Pennsylvania revenues by roughly $900 million. The Senate Appropriations Committee fiscal note put the number even higher, estimating revenues exceeding $1.1 billion.
In the state’s view, the math was straightforward. From a manufacturer’s perspective, the consequences are more complicated.
It’s worth remembering who actually drives research and development in the commonwealth’s economy. Manufacturers account for the overwhelming majority of private-sector R&D spending in the United States, investing hundreds of billions of dollars each year in new products, advanced materials, process improvements, and productivity-enhancing technologies. From incremental engineering changes on the factory floor to breakthrough innovations in the research lab that create entirely new markets, manufacturing R&D is how ideas turn into jobs, exports, and economic growth. While R&D is important in every manufacturing industry, it’s particularly important to the technology and life sciences sectors – the very industries the Governor says he’s intent on attracting to Pennsylvania.
In Pennsylvania, that investment shows up not just in laboratories, but on shop floors, in pilot lines, and through continuous improvement efforts that make operations safer, more efficient, and more competitive. When tax policy affects the timing and cost of those investments, it does not just affect accountants and tax attorneys; it influences whether projects move forward, how quickly they scale, and where the next generation of manufacturing innovation takes place.
Federal R&D expensing was designed to encourage faster investment in innovation by improving near-term cash flow. That benefit still exists, but only at the federal level. In Pennsylvania, the slower deduction schedule dampens the impact and makes return-on-investment calculations more complex. Projects that appear attractive federally may look less compelling once Pennsylvania taxes are layered back in, particularly for capital-intensive manufacturers with ongoing engineering and process development work.
Multi-state manufacturers routinely evaluate tax treatment alongside workforce, infrastructure, and energy costs when deciding where to locate R&D teams, pilot operations, and advanced manufacturing functions. If these national companies have operations in multiple states, don’t be surprised when those other states are awarded new private investment. Stated plainly, Pennsylvania’s treatment of R&D expensing is a competitiveness issue.
The new R&D expense treatment also means the compliance burden in Pennsylvania grows. Decoupling means manufacturers must now track R&D expenses differently for federal and Pennsylvania purposes, maintaining separate calculations, and preparing additional documentation. For large firms, this is another line item. For mid-sized and growing manufacturers, it is another friction point that consumes time and resources that could otherwise be spent on innovation and growth.
The takeaway for manufacturers in the short term is to not panic, but prepare. Companies should revisit their R&D forecasts with separate federal and Pennsylvania assumptions, ensure that process improvements and engineering activities are properly captured as R&D, and engage tax advisors early to avoid unpleasant surprises.
Harrisburg-based CPA and tax expert, Dolly Lalvani, computed an example of what a Pennsylvania corporation may face in the coming years. She stated, “Starting in 2025, federal law allows corporations to fully deduct Section 174 R&E costs immediately, reversing the prior amortization requirement. Pennsylvania, however, decouples, requiring corporations to add back all federal Section 174 deductions and instead allowing a state-specific deduction of 20% of the unamortized R&E balance each year. This creates a front-loaded increase in Pennsylvania taxable income, producing higher CNIT liabilities in the early years and a net Pennsylvania tax increase. In this example, if a US-based corporation expensed $500,000 per year through 2031, that entity would face an increase of approximately $29,000 ($22,910 net of federal benefit).”
From our perspective, it’s even clearer – we must advocate to fix this issue and allow for full R&D expensing, immediately. Pennsylvania manufacturers compete nationally and globally, and tax policy should support that reality. PMA will continue pressing policymakers to recognize that a strong manufacturing economy depends on encouraging investment in R&D, not slowing it down one complex deduction at a time.
