Internal Research and Development (IR&D) holds a special place in the world of aerospace and defense innovation. It doesn’t fit neatly into either government control or typical market forces. Rather, IR&D represents the commitment of private companies by investing their own resources to push the boundaries of technology, often ahead of any official government requirements or contracts. For many years, this approach has been the backbone of America’s aerospace leadership, allowing firms to take on early financial and technical risks with the intent of creating groundbreaking systems.
Historically, IR&D has proven to be a cornerstone of national capability rather than just an add-on. According to a primer from the Aerospace Industries Association, IR&D encompasses the efforts made by companies to enhance technology, improve their products, and develop new capabilities without being tied to specific contracts. This independence is its greatest strength. It empowers businesses to explore innovative technologies even before the government lays out its needs, enabling rapid adaptation to new operational threats and challenges.
Industry analyses stress the strategic significance of IR&D as a vital tool for nurturing technologies that are unique to defense. These technologies don’t benefit from broader commercial markets, making it hard to depend on venture capital or market demand for their development. IR&D fills that gap, allowing companies to invest in critical capabilities essential for national security, even when those investments might not seem financially attractive in the commercial world.
This distinction is more important today than ever. Unlike many software startup companies, often backed by venture capital and focused on rapid growth within diverse markets, aerospace and defense projects require hefty investments in manufacturing, long development cycles, and intricate supply chain integration. The risks involved can be massive and the time from initial concept to fielding of a system can span a decade or longer. As industry experts point out, contractors take on these risks with the hope of future demand, which may sometimes be uncertain due to potential program cancellations or budget adjustments. IR&D is the mechanism that helps manage these risks across a company’s broader activities.
The contributions of IR&D to maintaining technological leadership cannot be overstated. A joint industry white paper from the late Cold War period asserted that independently funded research and development efforts were crucial for ensuring U.S. dominance in system design and production. This is a conclusion that remains relevant today. Many of the technologies that define modern aerospace systems started as internally funded projects before transitioning to government contracts. Innovations in avionics, sensing technologies, propulsion, and manufacturing processes often follow this pattern deep rooted by IR&D, refined through independent efforts, and eventually incorporated into formal government programs. These independent efforts frequently retire key technology or program risks such that the scope and complexity of a government program can be better bounded resulting in a more efficient use of taxpayer dollars.
Current policy has partially addressed one of the aerospace sector’s most significant concerns regarding research and development investment. The One Big Beautiful Bill Act (OBBA), enacted in July 2025, restored full expensing for domestic research and development expenditures under Section 174 of the Internal Revenue Code. That change corrected what many viewed as a structural disincentive to long-cycle innovation investment.
While the restoration of expensing represented an important policy correction, the broader strategic question remains unresolved. The issue is no longer solely whether firms may immediately expense research and development costs. It is whether the United States has established a sufficiently durable and coherent innovation policy framework to support sustained investment in defense-critical technologies over the long term.
The restoration of immediate expensing was particularly significant for the aerospace and defense sector, where research and development timelines often extend across many years and require substantial upfront capital commitments. Unlike sectors driven primarily by software iteration or rapid commercialization cycles, aerospace innovation frequently involves expensive manufacturing infrastructure, systems integration, unique testing environments, and highly specialized supply chains. Delayed cost recovery disproportionately affected these activities because firms were required to absorb substantial near-term costs while realizing tax benefits only gradually over time.
While the restoration of expensing represented an important policy correction, the broader strategic question remains unresolved. The issue is no longer solely whether firms may immediately expense research and development costs. It is whether the United States has established a sufficiently durable and coherent innovation policy framework to support sustained investment in defense-critical technologies over the long term.
Policy stability matters as much as policy design. IR&D investments are frequently made across multiyear or even decade-long horizons. Firms make capital allocation decisions based not only on current tax treatment, but also in part on expectations regarding future legislative and regulatory conditions. Frequent shifts in tax policy create uncertainty that can discourage precisely the type of long-duration investment required for advanced aerospace capability development.
Congress therefore has an opportunity to move beyond short-term correction and toward long-term strategic alignment. Preserving predictable treatment of research and development expenditures, aligning tax policy with acquisition policy, and reinforcing incentives for defense-critical innovation would provide a stronger foundation for sustained industrial investment.
Additionally, Congress could explore targeted measures that promote investment in areas crucial to national security. This might include enhanced incentives for research and development related to defense-critical technologies, advanced manufacturing, and supply chain resilience. Such measures wouldn’t stray from market principles; rather, they would acknowledge that certain types of innovation are often underprovided by the market due to their inherent risks and limited commercial appeal.
Equally crucial is preserving the existing framework that allows companies to recover IR&D costs through defense contracts. Efforts to limit or cap this recovery threaten to undermine the very mechanism that encourages independent investment. If firms cannot recoup a reasonable portion of their IR&D spending, they will understandably scale back their investments. In the context of defense, where other funding sources are scarce, this would lead directly to diminished innovation.
Reviving immediate expensing for research and development, enhancing the approval process for independent research and development in defense acquisitions, and offering focused incentives for key investments could significantly bolster the U.S. aerospace industry’s innovative spirit. The beauty of these proposals is that they wouldn’t require new programs or add more layers of government bureaucracy. Instead, they would empower the private sector to continue its vital role in driving technological advancements.
Restoring immediate expensing under Section 174 was an important step toward realigning tax policy with the realities of aerospace innovation. The next challenge is ensuring that this framework remains stable, strategically coherent, and supportive of long-term investment in defense-critical technologies. As geopolitical competition intensifies and advanced capability development becomes increasingly capital intensive, the United States will depend heavily on private-sector willingness to undertake independent research and development risk. Maintaining that investment environment is not simply a matter of tax policy. It is a matter of national competitiveness and technological leadership.
References
- Aerospace Industries Association (AIA). The ABCs of IR&D (A Primer).
- Aerospace Industries Association (AIA). The Importance of Independent Research and Development.
- Aerospace Industries Association (AIA), Electronic Industries Association (EIA), and National Security Industrial Association (NSIA). Maintaining Technological Leadership: The Critical Role of IR&D/B&P (1989–1990 White Paper).
- Aerospace Industries Association of America, Inc. 1974 Annual Report.
- Aerospace Industries Association (AIA). Comparison of Executive Order 14372 and S. 4212, “Prioritizing the Warfighter in Defense Contracting.”
- U.S. Code. 10 U.S.C. § 3762.
- U.S. Code. 10 U.S.C. § 3322.
- Federal Acquisition Regulation (FAR), Part 15.404-4.
- Internal Revenue Code, 26 U.S.C. § 174.
