The Big Story: R&D tax credit changes create tax bill for startups
Startups and other companies are facing higher taxes this year after a provision from a 2017 tax law went into effect recently. The law, the Tax Cuts and Jobs Act (TCJA), triggers a change to how the research and development (R&D) tax credit operates. Unless policymakers step in, startups and small businesses will have to weather the blow to their cash flow and may consider limiting future R&D costs. This could ultimately result in an overall reduction in innovation in the U.S., slowed economic growth, and decreased ability for our innovation ecosystem to compete with other countries.
The R&D tax credit has been critical for innovative startups to maximize the use of their limited resources. Previously, companies could immediately deduct qualifying R&D expenses to reduce their tax liability. But now that this provision of the TCJA has gone into effect, R&D costs must be amortized over five years, making R&D more expensive. R&D itself is costly, and immediate expensing helped to offset the investment, particularly for small companies—many of whom may have proportionately higher amounts of R&D expenses because of their size. As quarterly estimated tax payments come due, businesses are already navigating how to deal with the change, and some founders are facing significant bills that could amount to more than their salary.
While there is bipartisan support for a fix to the tax credit, including the American Innovation and Jobs Act, sponsored by Sens. Hassan (D-N.H.) and Young (R-Ind.), policymakers failed to move legislation last year and remain at a standstill. Without a Congressional fix, startups will have less incentive—and ability—to conduct the cutting-edge research that acts as the bedrock of our innovation ecosystem. We risk falling behind our competitors and adding another roadblock to a startup’s growth. Policymakers should act swiftly to support innovation.
Policy Roundup:
First Citizens agrees to purchase Silicon Valley Bank. This week, Raleigh-based First Citizens BancShares purchased and assumed the commercial banking business of Silicon Valley Bank (SVB) from the FDIC in the wake of the bank’s recent collapse. The transaction—which does not include SVB’s venture capital investment portfolio—is a step towards stabilizing the U.S. regional banking sector—which is important for startups who rely on them. SVB’s collapse has put a spotlight on small and mid-sized banks—which are relied upon by startups for better access to banking services and network building. Startup founders need security in the banking system, and policymakers should work to ensure that the fall of SVB does not limit options for innovative new companies.
California agency approves privacy regulations. California Consumer Privacy Act regulations became effective Wednesday and will be enforceable as of July 1st. The state’s privacy rules contain novel elements not found in other states’ privacy laws. As a result, startups often face confusion and increased costs as they endeavor to comply with the varying privacy rules around the country, which highlights the need for a uniform privacy framework nationwide.
New study highlights need for immigration reform. This week, the Brookings Institution released a report highlighting the need for immigration reform in the U.S. and the expansion of visas for specialized workers—like those needed in the technology sector. The report additionally explores how vital it is for policymakers to support immigration reforms in order to strengthen the U.S. workforce and economy. Engine has repeatedly highlighted that immigrants are critical to our innovation ecosystem, serving as founders and filling talent gaps, particularly in STEM fields.
Legislation impacting data flows advances in Europe. This week European officials are beginning inter-institutional negotiations known as “trilogues” and moving towards finalizing a law impacting industrial data in the EU. The law, known as the Data Act, will govern non-personal data like industrial or Internet of Things data and is aimed at unlocking the data economy in Europe. U.S. startups are paying close attention because the legislation will impact international data transfers, and EU policymakers should make sure that the Data Act avoids restrictions on such transfers.
Publishing lawsuit implicates fair use. This week, a federal judge sided with publishers in Hachette v. Internet Archive—a lawsuit brought by four book publishing companies against the website, ruling that its lending of digital copies of books did not amount to fair use under copyright law. Fair use is one of the few doctrines in copyright law that permits people to reuse a copyrighted work without permission and is important to innovation online.
Startup Roundup:
#StartupsEverywhere: Santa Rosa, California. After experiencing California’s water crisis firsthand, Lumo CEO Devon Wright sought out a solution to making farmers’ water use cost-efficient and remotely accessible. We sat down with him to hear about his experience as a serial entrepreneur, the importance of broadband access to rural communities, and the ways the U.S. can realize our sustainability goals.
