Some changes in the Federal Tax Law are beginning to have a negative effect on startups — especially bootstrapped ones — as the way startups can handle Research & Development expenditures shifts from “all at once” to amortized over a five year period. But Senator Ron Wyden is part of an effort to prevent — or at least forestall — that from happening.
How it used to work: If a company had $1.5 million in revenue and $1 million in expenses (let’s say it was entirely domestic R&D), it would pay taxes on its $500,000 profit.
How it works now: In the same example, the company would have to amortize the $1 million in expenses over five years, so it would deduct only $200,000 (one fifth) and would pay taxes on $1.3 million in profit.
Oregon’s senior senator is looking to stave this off for at least a few more years.
“By incentivizing R&D, this plan is also going to promote innovation and help sharpen our economic competitiveness with China and the rest of the world,” said Senator Wyden. “My goal remains to get this passed in time for families and businesses to benefit in this upcoming tax filing season, and I’m going to pull out all the stops to get that done.”
What’s the effort entail? I asked Rosie to summarize it for us, and here’s what he had to say:
The Tax Relief for American Families and Workers Act of 2024 includes several provisions that impact startups, particularly in the area of taxes and Research & Development (R&D). Here are the key points:
- R&D Expensing: The act allows businesses of all sizes to immediately deduct the cost of their U.S.-based R&D investments, rather than spreading the deductions over five years. This change is designed to encourage innovation and improve the competitive position of American businesses against global competitors.
- Interest Deductibility: The act provides continued flexibility for businesses that need to borrow at higher interest rates to meet their payroll obligations and expand their operations.
- 100 Percent Expensing: It restores full and immediate expensing for investments in machines, equipment, and vehicles, which can be particularly beneficial for manufacturing startups and those that rely heavily on equipment.
- Taiwan Double Tax Relief: The act aims to strengthen America’s competitive position with China by removing the double taxation that currently exists for businesses and workers with a footprint in both the United States and Taiwan.
These measures are part of a broader tax framework intended to support working families, spur economic growth, and improve competitiveness. For startups, these changes could mean more immediate tax relief and incentives to invest in R&D and capital expenditures.
For more detailed information, you can refer to the section-by-section summary of the Tax Relief for American Families and Workers Act of 2024.
For more on the potential impact to startups, read “A 2017 law comes back to haunt startups in 2024.”
(Hat tip Justin Jones)
