Trump's new policy on research and development may bring a "cash flow revolution" to usa companies! By allowing companies to record research and development expenses instantly, businesses can not only reduce their tax burden but also significantly enhance their liquidity.
President Donald Trump proposes allowing companies to immediately record their domestic research and development expenses, rather than spreading them over five years.
One of Trump's less discussed policy proposals focuses on companies' expenditures on research and development. Some companies may see a significant increase in cash flow.
This policy adjustment will allow American companies to immediately record all domestic research and development expenses when spending on research and development. Starting in 2022, they must spread R&D expenses over five years. For example, $100 of R&D investment will appear as a $20 expense each year over five years. With this change, companies will record the full amount immediately when spending, resulting in lower reported profits and reduced tax bills.
This will increase operational cash flow. The cash spent by companies on research and development remains the same, but the taxes they pay decrease.
Trump's policy intent is to have companies shift more research and development spending to the USA. The resulting increase in cash flow may prompt them to make more investments in their business, or they may choose to keep the funds in the company, repay debt, or buy back stocks. In any case, this policy is another business-friendly policy, and investors should be aware that if implemented, dozens of companies will see a significant increase in cash flow.
The downside is that this reduces government income, and at a time when the government is spending historically unprecedented amounts, the market will first focus on the positive impact of this policy on company finances.
This is also why Wolfe Research's Chief Investment Strategist Chris Senyek has identified the companies that benefit the most. He found that dozens of companies will see a significant increase in operational cash flow because their R&D expenses represent a high proportion of sales. As they immediately account for more R&D expenses, they will see substantial tax relief.
Senyek looked at the annual average research and development spending of these companies in the USA over the past five years, and displayed the tax savings they would immediately realize by capitalizing research and development expenses. This enables Senyek to demonstrate the potential growth of operating cash flow in 2025 based on today's analyst consensus estimates.
Among these companies, the largest industry representatives are the medical care industry, as pharmaceutical companies require significant investment in research and development for developing new drugs; as well as the technology industry, which is an industry constantly innovating. Other stocks include Meta Platforms (META.O), paypal (PYPL.O), Zoom (ZM.O), gilead sciences (GILD.O), merck (MRK.N), and Biogen (BIIB.O).
These companies are expected to see a growth of 2% to 20% in operating cash flow next year. Not all research and development spending occurs in the USA. Senyek uses the ratio of these companies' USA sales to total revenue to roughly estimate their research and development spending in the USA. This provides investors with a concept of their USA spending, but tax expert Robert Willens points out that this is not completely accurate. Ultimately, Willens states that tax authorities need to review the actual research and development payments made by these companies in the USA.
Electronic Arts Inc (EA.O) is also on the list. Over the past five years, its annual average research and development spending was $2.1 billion, approximately one-third of its $6.6 billion annual sales. Not all expenses occur in the USA, so Senyek estimates that the tax savings next year will exceed $0.1 billion.
This means that Electronic Arts Inc's operating cash flow will increase by 10% next year, with analysts expecting it to exceed $2 billion.
Lyft (LYFT.O) could be the biggest beneficiary. Since all its sales occur in the USA, most or even all of its research and development budget is spent in the USA. Its recent annual average research and development spending was $0.728 billion, about one-fifth of its $3.5 billion annual income.
This means that Lyft will save approximately $0.153 billion in taxes next year, thereby increasing the expected operating cash flow by over 40%, according to Senyek.
If Trump makes progress in pushing this policy through Congress, these stocks may soar significantly.
