The Big Story: Tax package could support families and boost startup innovation
Lawmakers unveiled a proposal this week addressing key issues for the startup ecosystem by coupling a temporary expansion of the Child Tax Credit with fixes for R&D tax treatment. Startups have been struggling with higher tax bills as the result of changes in R&D tax expensing, and the number of women in entrepreneurship took a hit following the expiration of expanded child care benefits. The nearly $80 billion bipartisan deal is a crucial step for U.S. startups and for women founders and workers struggling to afford child care.
The bipartisan framework, which is awaiting action in the Senate after it was marked up in the House Ways and Means Committee today, would restore immediate expensing for R&D expenses retroactively to 2021 and forward for taxable years through December 31, 2025. Expenses presently must be amortized over five years, thanks to changes from a 2017 tax law that recently kicked in. Foreign R&D expenses would still face a 15 year amortization. Immediate expensing is critical for cash-strapped startups, as Matt Caywood, CEO of Washington D.C.-based startup Actionfigure told us, amortizing R&D expensing “is a major disincentive to startup R&D. If it stays in place, it is going to materially impact startups as they invest in product development which they cannot deduct as they go, and could even cause a cash crunch for many startups at a critical time.” Many startups have faced significant tax bills due to changes in R&D tax expensing, limiting their ability to conduct R&D, hire, and grow. While this provision is a significant win for the startup ecosystem, policymakers should work to make immediate expensing permanent to ensure startups do not face the same problem again starting in 2026.
The deal also includes temporary relief for millions of working parents, including startup founders, with a limited expansion of the child tax credit, increasing the maximum refundable credit incrementally from $1,600 to $2,000 year over year through 2025. This is an important step that will help many founders, but it does not go as far as past expansions. In 2021, the credit was boosted to $3,000 per child ($3,600 for each child under 6) and resulted in monthly payments for eligible parents, but this proposed expansion would not result in monthly payments and could have limited benefit to those with little-to-no income.Though the current proposal falls short of the pandemic-era expansion, if passed, it stands to lift as many as 400,000 children out of poverty in the first year and 500,000 or more when fully in effect.
While the package still faces hurdles as it makes its way through Congress, it represents a first step in supporting founders, especially women founders, with children. The innovation ecosystem is held back because of the lack of affordable child care, limiting who can afford to take on the risk of entrepreneurship. Congress still has a ways to go to support working parents. In a new video, Kate Tummarello, Executive Director of Engine and Elizabeth Tenety, Co-Founder of Motherly dive into what founders with children need from Congress— including a permanently expanded child tax credit and renewed child care stabilization funds. For innovation to truly thrive, Congress must make affordable child care a national priority.
Policy Roundup:
Bipartisan congressional trade leaders urge renewal of agreement to avoid digital tariffs. This week, thirty members of Congress sent a letter imploring the U.S. Trade Representative to prioritize the renewal of a critical trade policy that keeps barriers to trade low for startups. Under that policy, the World Trade Organization Moratorium on Customs Duties on Electronic Transmissions, countries have agreed not to impose customs duties—tariffs—on electronic transmissions, including digital goods and services like software. The moratorium has been in place since the early days of the commercial Internet, has been consistently renewed at every WTO Ministerial Conference since, and has contributed significantly to development and the growth of digital trade. There is increasing interest from a few countries in ending the moratorium, which would be devastating for digital trade and raise barriers for startups.
House committee explores ways to bolster the AI workforce. A House subcommittee held a hearing on Wednesday examining how to strengthen and enable the U.S. workforce to take advantage of artificial intelligence. Members of the committee highlighted how studies show AI poised to create more new roles than it disrupts and called for AI training to go beyond traditional four-year degrees. Those comments echo Engine’s longstanding position that the U.S. must pursue an all-of-the above approach to bolster AI talent, through AI education, job training, upskilling and more.
New study shows adverse impact of California independent contractor law. A new study released this week found that California Assembly Bill 5 (AB5)—which restricts the ability of companies, including startups, to hire independent contractors—led to a reduction in self-employment and did not vastly increase the hiring of W-2 employees. Efforts to restrict hiring flexibility hamper the ability of startups to best build their companies—especially as many startups rely on contract labor for one-off projects as they grow. The study comes on the heels of the Department of Labor’s final rule on independent contractors, which could result in a nationwide decrease in overall employment and stifle innovation and entrepreneurship.
Supreme Court hears case with implications for agency rulemaking, tech policy. During oral arguments this week, the Supreme Court appeared poised to overturn a 40-year old precedent, which could diminish the deference given to federal agencies’ interpretations of the law. That change could impact agencies actions in the tech space, including by making the Federal Communications Commission’s net neutrality rulemaking easier to undo or calling into question the Biden administration’s use of the Defense Production Act to regulate artificial intelligence.
Startup Roundup:
#StartupsEverywhere: New York, New York. Cobble provides an answer to an age-old question posed by many couples and friend groups who desire quality time together but are overwhelmed with the sheer number of activities out there. We sat down with Founder and CEO Jordan Scott to talk about the inspiration behind the platform and the role AI plays in how Cobble operates.
