The Big Story: House advances tax package with pro-startup provisions
A House committee advanced multiple tax bills this week that include several startup priorities. Legislation passed by Republicans on the House Ways and Means Committee includes two bills—the Small Business Jobs Act and the Build It in America Act—that would fix R&D expensing, create startup investment incentives, and fix the reporting threshold. While the entire package faces uncertainty in the Democrat-controlled Senate, several provisions—including startup priorities like R&D expensing— have bipartisan support.
Creating a tax fix for R&D expensing—which is included in the Build It in America Act—is a priority for many startups, as many recently voiced to Congress. Startups have been battling higher taxes this year following a provision that went into effect from a 2017 tax law. Before this year, startups and small businesses could immediately deduct qualifying R&D expenses—a crucial part of scaling a company—to reduce tax liability. However, the provision makes it so R&D costs have to be amortized over a minimum of five years. This creates costly tax payments innovators have to shoulder.
Incentives to innovate and invest in startups are critical for startups, and the Small Business Jobs Act expands some long-used tax incentives for startup investment like those for qualified small businesses. Qualified small business stock (QSBS) tax treatment supports startup founders, including by easing their ability to attract early talent and investment, and keeps capital from successful exits in the startup ecosystem. Over a hundred startups last year told Congress how important QSBS was to the startup ecosystem, and this week a coalition of startup supporters applauded the inclusion of the QSBS provisions in the package.
The Small Business Jobs Act also expands opportunity zones to incentivize investment or building businesses in rural areas and restores to $20,000 a tax reporting threshold lowered last year. That threshold, lowered to $600 by the American Rescue Plan but delayed until next year, would require individuals who earned at least $600 from online platforms to file 1099-K income tax forms. The lower threshold risks capturing everyday users of common online platforms, including small sellers and other digital entrepreneurs.
The Republican-led tax package includes important provisions to support innovators across the country. The bills should serve as an opening to further negotiations around the broader tax package so that these important elements for startups can one day be signed into law.
Policy Roundup:
Senate takes steps toward AI regulation. This week, a Senate subcommittee held a hearing to examine the impacts of artificial intelligence technology on human rights, which touched on other key issues for startups, including Section 230 and a national data privacy law. Also this week, the Senate held the first of three briefings on AI as part of its ongoing efforts to accelerate understanding of the promises and risks of the technology. As policymakers continue learning about AI, it is imperative that they hear from startups using and innovating with the technology as we and others wrote to Congress this morning.
Maryland lawmaker questions state’s controversial digital tax. In an op-ed this week, Maryland State Delegate. Nic Kipke (R) explored how the state’s likely unconstitutional digital advertising tax will negatively impact entrepreneurs in the state. Earlier this year, Maryland’s Supreme Court reversed and dismissed a challenge to the law that a lower court had found unconstitutional—but only on procedural grounds. Del. Kipke argued that the law will eventually be again found unconstitutional, but in the meantime, the burden of the tax will be borne by startups rather than the large tech companies the law’s supporters say it targets.
Europe advances AI rulebook. Following a plenary vote this week, the European Parliament adopted its position on the AI Act, advancing the legislation to the final stage of the EU legislative process known as the trilogues. The Parliament, the Council, and the Commission will negotiate to reconcile differences in their versions of the text, a process expected to take as long as through the end of the year. As they do, it is critical for EU policymakers to adhere to the risk-based approach the Act was conceived upon, ensuring that only truly high-risk uses of AI are subjected to the most stringent obligations in the law so as not to burden innovative, innocuous uses of AI.
Senators probe controversial spying program as Congress weighs renewal. The Senate Judiciary Committee this week held an oversight hearing to discuss Section 702 of the Foreign Intelligence Surveillance Act—a controversial surveillance program up for reauthorization this year. Senators remained skeptical during the hearing, highlighting abuses of the program that circumvent Americans' Constitutional rights. While Section 702 remains a long-time concern of civil liberties and privacy advocates, the program is also of concern for startups given its impact on international trade. Section 702 has been central to the downfall of multiple cross-border data transfer mechanisms, hindering U.S. startups’ ability to compete abroad.
House committee examines resources available for startups. This week, the House Committee on Small Business held a hearing to examine the effectiveness of the Small Business Administration (SBA) and potential reforms to empower entrepreneurs. Witnesses emphasized the need for better coordination and outreach around SBA resources like grants, workforce training centers, and Small Business Development Centers. Busy startup founders can only make use of resources they are aware of, and increasing collaboration between the public and private entities that support startups is integral to ensuring available resources are effective and reach the startup ecosystem.
Startup Roundup:
#StartupsEverywhere: Lafayette, Louisiana. As a mom, Laurel Hess understands the difficulties of multitasking and juggling competing priorities around the home. She created hampr to provide busy people with freshly done laundry and community members with a source of additional income. We spoke with her about the multiple ways hampr benefits local communities, the impact of various data privacy laws on her business, and her experience as a mom and woman founder.
