The Big Story: Over 100 startups, investors, organizations defend QSBS tax treatment
This week, more than 100 startups, startup investors, and startup support organizations sent a letter to Congress urging them to preserve the current tax treatment of Qualified Small Business Stock (QSBS), which helps startups attract early-stage investment and employees. The letter comes after Congress proposed eliminating the tax treatment as part of the Build Back Better (BBB) legislative package last year.
Found in Section 1202 of the Internal Revenue Code, QSBS is a bipartisan incentive first introduced in the nineties that allows holders of QSBS to limit capital gains taxes if they meet certain conditions. Starting, joining, or investing in new companies is risky, since the majority of startups fail. The incentive QSBS provides encourages founders to take on the risk of starting a company, helps founders recruit the skilled talent they need to grow, and attracts investment to fuel startups as they scale. And importantly, startup founders and investors often reinvest the returns they earn into new startups, meaning the capital stays in the startup ecosystem, supporting new innovation, jobs, and economic growth.
Last year’s BBB included adjustments to QSBS that would have curtailed tax treatment for earners over $400,000 or more, for any relinquishment of stock occurring after September 13, 2021, and they would have affected both new QSBS holders and those who already held stock. Though the BBB stalled in late 2021, lawmakers should oppose provisions that could stand to harm the startup ecosystem, especially in bills aimed at improving economic competitiveness. Startups drive innovation, contribute significantly to economic growth, and create jobs in communities across the country. The current tax treatment of QSBS is essential to support startup growth and further the geographic spread of startup investment all across the country. To support startups, Congress must preserve the current tax treatment of QSBS, not undermine it in any future legislation.
Policy Roundup:
House panel pushes forward on federal privacy conversation. The House Administration Committee held a hearing this week where lawmakers discussed the role and risks of data collection as well as the potential for federal privacy legislation. As we’ve long argued, both consumers and startups can benefit from a federal privacy law that supports appropriate data control and prohibits abusive data practices. A federal law becomes increasingly critical as more states consider and pass their own privacy laws, which can create compliance burdens that fall disproportionately on startups.
Industry groups push for competitiveness bills. This week, 20 industry associations sent a letter urging Congressional leaders to find a path forward on the two sweeping U.S. competitiveness bills: the House-passed America Creating Opportunities for Manufacturing, Pre-Eminence in Technology, and Economic Strength (COMPETES) Act and the Senate-passed United States Innovation and Competition Act (USICA). While the proposals contain several provisions that would bolster the startup ecosystem, America COMPETES contains the SHOP SAFE Act, which would create substantial new barriers for e-commerce startups, and an amendment that would burden capital formation for startups.
Millions of homes connected with new broadband program. This week, the Biden administration announced that 10 million homes have successfully enrolled in the Affordable Connectivity Program. Created as an extension of the Emergency Broadband Benefit, the Affordable Connectivity Program is the country’s largest broadband affordability program and has helped steer monthly Internet service funds towards eligible households. As we’ve mentioned before, reliable and accessible broadband is crucial for startup growth, community connectivity, and supports furthering the spread of innovation as a whole.
Multi-sector letter seeks repeal of policy that denies access to patent reviews. The general counsel of over 20 companies recently sent a letter to Secretary of Commerce, Gina Raimondo, urging the repeal of the so-called “NHK-Fintv rule”—a previous administration policy, also known as “discretionary denial,” where the patent office declined to review likely-invalid patents for procedural reasons. As the letter notes, this policy unfairly denies access to inter partes review (IPR) and instead has essentially written these protections out of the law, causing irreparable harm to innovators across the country. The patent system plays an imperative role in American innovation, and as we have explained, patent reviews like IPR are important to promoting quality and combating abuse in the system. It’s vital policymakers reverse the NHK-Fintiv rule and restore balance.
Startup Roundup:
#StartupsEverywhere: Los Angeles, Calif. Abstract is working to enable access to and understanding of California legislative and government data. Co-Founders Patrick Utz and Matthew Chang spoke to us about their vision for the Abstract platform, the need for policies that enable growing startups' ability to access new talent, and why lawmakers should support tax incentives that encourage innovation.
