The Big Story: Startups call on Congress to fix R&D expensing
Lawmakers in both chambers of Congress took steps this week toward addressing a critical tax issue impacting startups’ bottom lines: a recently enacted change to how startups expense research, development, and experimentation costs. House and Senate lawmakers held two hearings this week exploring how the tax code, including incentives around R&D impact small businesses and startups. Ahead of the hearings, Engine, joined by over 60 founders, innovators, and startup support organizations, sent a letter to Congress highlighting the impacts the change has had on many R&D-dependent startups, and urging policymakers to restore the ability to immediately deduct R&D expenses.
R&D is critical to the growth of many startups and small businesses, but conducting R&D is incredibly costly. Without tax incentives, like the R&D tax credit and immediate expensing for research and experimentation costs, R&D can be out of reach for many growing businesses. Unfortunately, 2017’s Tax Cuts and Jobs Act (TCJA), has put continued startup investment in R&D at risk, as companies are now required to capitalize and amortize R&E expenses over five—or, if business is conducted outside of the U.S.,15—years, limiting a startup’s cash flow, forcing them to choose between R&D and other critical expenses like hiring.
On Tuesday, the House Committee on Small Business’ subcommittee on Economic Growth, Tax, and Capital Access explored the importance of incentivizing innovation by way of the tax code. The subcommittee highlighted the critical role R&D plays in American innovation, including by entering the letter from startups into the hearing record. And on Wednesday, a joint roundtable between the Senate Finance Committee and Senate Committee on Small Business and Entrepreneurship centered on ways the tax code impact on small businesses, including through R&D incentives.
Senate policymakers are pursuing a fix to R&D expensing through the proposed American Innovation and Jobs Act, sponsored by Sens. Young (R-Ind.) and Hassan (D-N.H.), which technology entrepreneur witnesses at the hearing emphasized as critical to “small business growth and participation in R&D.” Similar legislation has been introduced in the House in addition to a coming broader tax package aimed at galvanizing economic growth that would include a return to immediate expensing for R&D expenses. For startup-led innovation to continue to thrive, policymakers in both chambers, on both sides of the aisle must come together to immediately pass a fix to R&D expensing.
Policy Roundup:
House passes additional capital formation bills. This week the House passed several capital formation bills to boost startup access to capital, building on the passage of multiple bills last week. The bills aim to diversify the pool of eligible investors and create additional investment in startups by expanding the accredited investor definition and would facilitate fundraising and successful startup exits through initial public offerings. Capital access is critical for startup success and these bills that address longstanding headwinds must be taken up by the Senate and ultimately signed into law.
Oversight hearing dives into workforce issues impacting tech talent. The House Committee on Education and the Workforce held an oversight hearing this week featuring nominee and Acting Secretary of Labor Julie Su, which surfaced key issues impacting the startup ecosystem. Republican lawmakers expressed concern with the Administration’s attempts to reclassify independent contractors, while Democrats underscored the importance of workforce development programs to strengthen talent pools that are needed to support U.S. investments in critical technologies. The U.S. faces a shortage of STEM talent in the innovation ecosystem, and the ability to hire independent contractors gives startups the hiring flexibility they need as they grow, when workflow may not warrant hiring full time talent.
Senate committee examines AI and patent law. This week, the Senate Judiciary Intellectual Property subcommittee conducted a hearing to examine patent eligibility, ownership, and the relationship between AI-generated inventions and intellectual property law. Multiple witnesses emphasized that AI currently serves as a facilitator of invention rather than as an inventor itself. Other witnesses and committee members meanwhile expressed the need to change which inventions are patentable. Balanced patent eligibility laws, where only truly new inventions are patentable are critical to avoid negative consequences arising from broad claims or low-quality patents that stifle innovation.
House committee looks to build support for legislation during digital asset hearing. This week, the House Agriculture Committee held a hearing examining digital assets with witnesses from regulators like the Commodity Futures Trading Commission and Securities and Exchange Commission. The hearing follows draft legislation released late last week designed to create certainty for innovators in the digital asset space and amid major enforcement actions announced this week by the Securities and Exchange Commission. Using lawsuits instead of establishing clear rules creates uncertainty and disincentivizes innovation by startups and discourages investors from supporting their companies.
Transparency critical to dissuade patent trolls. Shopify filed a motion this week to “aggressively pursue” identifying the funders of current patent litigation cases against the company, in a new bid to defend the entrepreneurs and innovators who use their services against patent trolls. Jess Hertz, Shopify’s General Counsel, explained the detrimental role patent trolls play within the innovation ecosystem—targeting businesses in weak lawsuits designed to extract a payment. Shopify’s motion would create greater transparency within the innovation landscape, and encourage the integrity of our patent system, leading to less abuse.
